Method, system, device, and media for managing debt support

ABSTRACT

A computer-implemented method, system, apparatus, and media is directed to minimizing a risk associated with an anticipated value of an investment. An insurer establishes a capital structure within a computer memory of a computer system, the capital structure designed to minimize risk and being pledged to fund a default associated with the investment. Establishing the capital structure can include allocating regulatory capital based on a coverage factor multiplied by an average annual depression scenario default percentage for the investment and determining a portion of the capital structure for a pledged insuring investment that produces at least a portion of the cash stream. A determination of whether the established capital structure is sufficient to obtain a minimal target credit rating for the insurer is generated. The desired target rating is electronically provided based on the determination.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. application Ser. No.12/955,852 filed on Nov. 29, 2010, which claims the benefit of U.S.provisional patent application No. 61/265,135 filed on Nov. 30, 2009,the entire content of each of which is expressly incorporated herein byreference thereto.

TECHNICAL FIELD

The present invention relates to a method, system, apparatus, and mediafor managing insurance of debts. More particularly, but not exclusively,the present invention relates to insuring against defaults on bondobligations.

BACKGROUND

Bond insurers are monoline (single industry) insurance companies thatprovide credit enhancement in the form of a financial guaranty forbondholders. Traditional bond insurers rely on invested cash capital tosupport their claims paying ability. Capital has historically beenprovided by a holding company that raises funds by issuing stock (commonand preferred) and debt and then depositing a substantial portion of theproceeds in a wholly owned operating subsidiary to capitalize theinsurance company. The subsidiary's capital base is used to supportguarantee underwriting. For each insured credit, the rating agencies canrequire that a portion of the insurance subsidiary's capital be setaside to offset the risk exposure. The amount set aside for each credit,which is known as a capital charge, is based on two measures of thequality of the risk underwritten:

-   -   The credit type, e.g. state general obligation (GO), city GO,        water and sewer system, school district, toll road, or hospital        system; and    -   The rating of the individual credit for which the capital charge        is being assessed.

The availability of capital to fund the capital charges for new insuredcredits serves as a constraint on the insurance capacity of the monolineinsurer, which can be addressed by raising additional capital.

The basis for the capital charges is the rating agencies' assessment ofthe risk of municipal default for each credit type and each ratingcategory thereof during a four-year depression scenario. The capitalcharges represent the anticipated percentage defaults within theinsurer's portfolio for each such credit type and rating category. Toachieve a AAA monoline rating the insurer's capital can cover theaggregate capital charges (i.e., its assumed four-year depressionscenario defaults) by at least 1.25 times. In practice the monolineinsurers have been capitalized at slightly higher level, e.g., 1.5 timesto 1.6 times. Based on these parameters, monoline insurers habituallyaccumulated risk exposure at insured risk-to-capital ratios in excess of100:1. If insured defaults occurred or the credit quality of theportfolio deteriorated so as to increase the monoline insurer's capitalcharges beyond its available capital, the insurer was expected to raiseadditional capital to pay claims and to maintain its AAA ratings. But,in a financial crises, raising capital at the time it is needed to fundpotential defaults may be difficult or impractical.

The value of the bond insurance product to municipal governments is inthe interest cost savings that can be achieved by being able to issuebonds based on the top available long term ratings. The value of bondinsurance for the bond investor is based on their willingness to forgo aportion of future investment return (the credit spread) for beingdirectly exposed to the underlying repayment risk of a purchased bond infavor of a lower return on an insured bond rated on the basis of theclaims paying ability assigned by the nationally recognized ratingservices to the bond insurer. In return for providing the additionalmargin of safety represented by the bond insurance policy, bond insurerscharge an insurance premium that is paid, usually upfront, by themunicipal bond issuer. The premium is paid from bond proceeds andrepresents a portion of the issuer's debt service savings.

Monoline insurers may use Collateralized Bond Obligations (“CBO”). CBOcreates strong credits (such as loans, bonds, or other obligations) bytranching a large pool of individual credits. The pool can be a largepool of unrated credits such as credit card receivables or a relativelysmall (e.g., 20 borrowers) pool of rated and/or unrated credits in thecase of a municipal State Revolving Fund (“SRF”). The high quality ofthe more senior CBO tranche(s) is achieved at the expense of the qualityof the more junior tranche(s). As the pools get larger, the percentageof underlying credits that can be expected to default decreases eventhough the absolute number increases. Thus, as the pool becomes larger,the smaller the percentage of total pool that is required to besubordinate, but the more likely it is that a subordinate tranche willin fact sustain losses. The most subordinate tranche is viewed assimilar to equity (in the case of an SRF, it is funded with programequity) and bears a large credit and yield penalty.

In general, because the subordinate tranche(s) bear the risk of adefault of an underlying credit and adding more credits increases thelikelihood that the subordinate tranche(s) will sustain losses (eventhough losses may decrease on a percentage basis), pools are generallyclosed unless consent is obtained from the holder(s) of the subordinatetranche(s). As a result, CBOs are generally only used in situationswhere there is a wide credit and yield spread between the quality of theunderlying credits and that of the senior tranche(s) or where there is acompelling business need for someone to hold the equity (e.g., to getthe underlying loans off the balance sheet).

Thus, there is a need for new ways to protect against defaults on bondobligations and the present invention provides some solutions to thisproblem.

SUMMARY OF THE INVENTION

The invention relates to a computer-implemented method for minimizing afinancial risk associated with an anticipated value of an investment,which comprises: establishing by a computer system of an insurer acapital structure within a computer memory, the capital structuredesigned to minimize the risk and being structured with capital to funda default on payments associated with the investment; generating by thecomputer system a determination of whether the established capitalstructure is sufficient to cover a depression scenario period to obtaina minimal target credit rating for the insurer; and electronicallyreceiving the target rating based on the generated determination.Advantageously, the investment comprises at least one of a debt, a bondor a loan, and wherein the establishing of the capital structurecomprises: allocating the regulatory capital in the computer memory toan amount equal to at least a coverage factor multiplied by an averageannual depression scenario default percentage for the investment;selecting by the computer system an investment criteria to invest theregulatory capital to create an investment return; and determining bythe computer system a portion of the capital structure for a pledgedinsuring investment.

The method preferably further comprises allocating, with the computersystem, a first credit having a first obligation to make specifiedpayments and a second credit having a second obligation to makespecified payments, each of the first credit and second credit being ina non-default state when a respective obligation is met and being in adefault state when a respective obligation is not met; associating, withthe computer system, a first senior holder and a first subordinateholder with the first credit using (a) a respective first senior holderfinancial instrument through which payments from the first credit flowto the first senior holder and (b) a respective first subordinate holderfinancial instrument through which payments from the first credit flowto the first subordinate holder; associating, with the computer system,a second senior holder and a second subordinate holder with the secondcredit using (a) a respective second senior holder financial instrumentthrough which payments from the second credit flow to the second seniorholder and (b) a respective second subordinate holder financialinstrument through which payments from the second credit flow to thesecond subordinate holder; and structuring the first senior holderfinancial instrument and the first subordinate holder financialinstrument in the computer memory to give priority to payments due thefirst senior holder prior to payments due the first subordinate holderin the event the first credit enters the default state.

Another method relates to insuring a default of a debt specified in afinancial instrument, by establishing, by a computer processor, aninsuring debt of a debtor related to the debt specified in a financialinstrument; allocating by the computer, in a computer memory associatedwith an insuring vehicle, a first loss class and a second loss class;and routing, over a computer network, a payment payable from theinsuring vehicle to a first class holder in the first class, wherein thefirst class holder is entitled to the payment based on an insured debtto the first class holder of the insuring debt, wherein the insuringvehicle insures an obligation to make payments for the insured debt. Inthis method, the insuring vehicle provides an insuring payment to aholder of the insured debt when the debtor defaults on the obligation tomake payments for the insured debt and wherein the routing comprisesintercepting at least a portion of the insuring payment when the debtordefaults on the obligation to make payments for the insured debt anddiverting at least a portion of the payment to the first class holder.

The method preferably further comprises providing an interactive userinterface configured to provide a simulation of the capital structureincluding an insuring scenario based on inputs for the capitalstructure, and wherein the user interface provides a mechanism to changethe inputs thereby changing the insuring scenario.

The invention also relates to a computer-implemented systems forcarrying out the methods disclosed herein. Also, non-transitoryprocessor readable media are described for carrying out the methodsdisclosed herein. A further embodiment is a graphical user interfaceconfigured to provide a simulation of the capital structure including aninsuring scenario based on inputs for the capital structure, and whereinthe user interface provides a mechanism to change the inputs therebychanging the insuring scenario.

BRIEF DESCRIPTION OF THE DRAWINGS

Further features of the invention, its nature and various advantageswill be more apparent from the following detailed description, taken inconjunction with the accompanying drawings in which like referencecharacters refer to like parts throughout, and in which:

FIG. 1 shows a flowchart of a method according to an embodiment of thepresent invention;

FIG. 2 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 3 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 4 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 5 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 6 shows a flowchart of a method according to another embodiment ofthe present invention;

FIG. 7 shows a block diagram of a software program according to anotherembodiment of the present invention;

FIG. 8 shows a block diagram of a system according to another embodimentof the present invention;

FIG. 9 shows a block diagram of a flow of funds according to anotherembodiment of the present invention;

FIG. 10 shows a block diagram of a method according to anotherembodiment of the present invention;

FIG. 11 shows a block diagram of a method according to anotherembodiment of the present invention;

FIGS. 12A to 12E are functional block diagrams of illustrative systemsfor managing debt according to another embodiment of the presentinvention;

FIG. 13 is an example of a computing device operable to execute variousaspects of the invention according to another embodiment of the presentinvention;

FIGS. 14A to 14D, 15 to 20, 21A, 21B, 22A, 22B, 23 to 25 are an examplesof computer-implemented process and models for managing debt insuranceaccording to embodiments of the present invention;

FIG. 26 shows an example of a data model for determining a percentage ofpossible defaults over a 4 year depression scenario for a type of debt;

FIGS. 27A to 27H and 28A to 28I show examples of a method, data model,and interfaces for providing calculations of a summary of theapplication of the BECM an a comparison against monoline systems;

FIGS. 29A and 29B show an example of a method, data model, and interfacefor computing a downgrade function, and sizing the insuring bond andloss class and/or category subclasses;

FIGS. 30A to 30C show examples of a method, data model, and interfacesfor providing calculations of sizing of structured insured and insuringbonds;

FIGS. 31A to 31I show examples of a method, data model, and interfacesfor providing calculations of coupons, proceeds, and yields paid by anissuer for insuring bonds;

FIGS. 32A to 32F show examples of a method, data model, and interfacesfor providing calculations of coupons, proceeds, and yields payable toholders of loss position subclasses; and

FIGS. 33A to 33F show examples of a method, data model, and interfacesfor providing calculations of debt service coverage based on debtinsurance.

DETAILED DESCRIPTION OF THE INVENTIVE EMBODIMENTS

The following description is presented to enable any person of ordinaryskill in the art to practice the present invention. Variousmodifications to the preferred embodiment will be readily apparent tothose of ordinary skill in the art, and the principles defined hereinmay be applied to other embodiments and applications without departingfrom the spirit and scope of the invention. Thus, the invention is notintended to be limited to the specific embodiments shown, but the claimsare to be accorded an appropriate scope consistent with the principlesand features disclosed herein as understood by skilled artisans. Thefigures are not necessarily to scale, some features may be exaggeratedto show details of particular components. Therefore, specific structuraland functional details disclosed herein are not to be interpreted aslimiting, but merely as a basis for the claims and as a representativebasis for teaching one skilled in the art to variously employ thepresent invention.

The disclosure of U.S. Pat. No. 7,593,894 is fully incorporated hereinby reference thereto. That application generally describes the creationof loss classes which can be incorporated into the methods and systemsof the present invention.

The invention relates to a computer-implemented for minimizing afinancial risk associated with an anticipated value of an investment.The method includes the step of establishing by a computer system of aninsurer a capital structure within a computer memory of a computersystem, the capital structure designed to minimize the risk and beingstructured with regulatory capital and a cash stream that is pledged tofund a default on payments associated with the investment; generating bythe computer system a determination of whether the established capitalstructure is sufficient to cover a depression scenario period to obtaina minimal target credit rating for the insurer; and electronicallyreceiving the target rating based on the generated determination. In oneembodiment, the investment comprises an insured bond issued by anissuer, and the cash stream is produced from a trust bond issued by theissuer.

In one embodiment, the investment comprises an insured bond issued by anissuer, and the cash stream is produced from an insuring bond issued bythe issuer. In another embodiment, the investment comprises at least oneof a debt, a bond or a loan, wherein the cash stream is produced fromthe investment, or a dividend or an account receivable associated withthe investment.

Establishing the capital structure can include allocating the regulatorycapital in the computer memory to an amount equal to at least a coveragefactor multiplied by an average annual depression scenario defaultpercentage for the investment; selecting by the computer system aninvestment criteria to invest the regulatory capital to create aninvestment return; determining by the computer system a portion of thecapital structure for a pledged insuring investment that produces atleast a portion of the cash stream; and/or securing a draw on sources ofthe regulatory capital based on the portion of the cash stream.

In one embodiment, the method can further include the step of includinga capital pre-funding in the capital structure; and determining by thecomputer system an amount of the capital pre-funding by the insurer inan amount that is a multiple of an average annual depression scenariodefault percentage that is based on an underlying credit rating of theinvestment.

The method can include the step of including a capital pre-funding inthe capital structure; determining by the computer system an amount ofthe capital pre-funding by the insurer that is sufficient to cover adefault and that is calculated by (a) at least a pre-funding coveragefactor multiplied by (b) a downgrade function that is applied to anaverage annual depression scenario default percentage for the investmentbased on the credit rating of the investment; examining by the computersystem, a capital adequacy of the insurer's capital structure to cover adefault based on a default scenario that occurs during or at an end ofthe depression scenario period; and determining the credit rating forthe trust based on the determined capital pre-funding and the examinedcapital adequacy.

In one embodiment, the method can further include determining a creditrating of the insurer based on the determined credit rating of thetrust.

In a preferred embodiment, the downgrade function comprises a weightedsum of a percentage of a given insured investment issued by a givenissuer that is at a current credit rating falling to a lower creditrating multiplied by another default percentage that is associated withthe given issuer's industry and the lower credit rating.

In one embodiment, the investment is an insured bond. The method canfurther include evaluation, by the computer system, of issuer data aboutproceeds (and/or the insured bonds) for minimizing the risk of defaultof the insured bond; sizing, by the computer system, an insuring bondbased on the received data about the insured bond, wherein the sizedinsuring bond produces the cash stream that provides the capitalstructure necessary to achieve the target credit rating; establishing,by the computer system, a trust certificate, wherein a payment from theinsuring bond is pledged to be paid to a holder of the trustcertificate; and routing payments by the computer system of the paymentto the holder of the trust certificate based on a legal obligation topay secured holders of a plurality of insured bonds, which includes theinsured bonds, wherein the legal obligation is recorded in the computermemory.

In yet another embodiment, the method can further include, based on anearly redemption of the insured bonds, providing savings of fees thatare not paid to the insurer for insuring the insured bonds in aremaining period for the insured bonds.

Sizing of the insuring bond can include determining a default criteriabased on the depression scenario, wherein the default criteria comprisesa plurality of default percentages for a plurality of issuers based onthe depression scenario, and wherein insurance coverage based on afactor of one of the plurality of default percentages is sufficient toachieve the target credit rating; determining a downgrade function forthe insured bond based on at least a portion of a plurality of insuredbonds insured by the insurer being downgraded to a lower credit rating;and determining the debt service coverage provided by the insuring bondfor the insured bond based on the default criteria and the downgradefunction.

Establishing the trust certificate can include establishing a losscategory subclass for the trust certificate; and determining, in thecomputer memory, for the trust certificate, a type of the loss categorysubclass, wherein a type comprises (i) a horizontal loss positionsubclass wherein a loss that obligates payment is allocated based on aposition within a plurality of loss position subclasses, with each ofthe loss position subclasses allocating the loss based on a categoryrating within that loss position subclass, or (ii) a vertical lossposition subclass, wherein the loss is allocated based on anotherposition within a plurality of categories, with each category allocatingthe loss based on a loss position rating within that category.

Establishing the trust certificate can instead include establishing aplurality of loss category subclasses; and determining a yield above acoupon amount for the insuring bond for each position in the losscategory subclasses, wherein the yield increases as the positiondecreases.

The method can further include allocating, with the computer system, afirst credit having a first obligation to make specified payments and asecond credit having a second obligation to make specified payments,each of the first credit and second credit being in a non-default statewhen a respective obligation is met and being in a default state when arespective obligation is not met; associating, with the computerssystem, a first senior holder and a first subordinate holder with thefirst credit using (a) a respective first senior holder financialinstrument through which payments from the first credit flow to thefirst senior holder and (b) a respective first subordinate holderfinancial instrument through which payments from the first credit flowto the first subordinate holder; associating, with the computer system,a second senior holder and a second subordinate holder with the secondcredit using (a) a respective second senior holder financial instrumentthrough which payments from the second credit flow to the second seniorholder and (b) a respective second subordinate holder financialinstrument through which payments from the second credit flow to thesecond subordinate holder; and structuring the first senior holderfinancial instrument and the first subordinate holder financialinstrument in the computer memory to give priority to payments due thefirst senior holder prior to payments due the first subordinate holderin the event the first credit enters the default state.

Intercepting the coupon payment can include using payments from thesecond subordinate holder financial instrument to perform the firstobligation of the first credit for the benefit of the first seniorholder to the extent that the first credit enters the default state andpayments due the first senior holder are not available, wherein both thefirst subordinate holder and the second subordinate holder are junior tothe first senior holder.

Determining the credit rating can include increasing in the at least onecomputer memory the credit rating for the first credit based on anincreased likelihood that a payment default can be fully absorbed,wherein the credit rating is representative of a probability of a partyowing the first obligation to make specified payments for the firstcredit to meet the first obligation.

The invention also relates to a computer-implemented system forminimizing a financial risk associated with an anticipated value of aninvestment. The system includes a company computer implemented componentfor establishing by an insurer a capital structure within a computermemory of a computer system, the capital structure designed to minimizethe risk and being structured with regulatory capital and a cash streamthat is pledged to fund a default associated with the investment;generating a determination of whether the established capital structureis sufficient to cover a depression scenario period to obtain a minimaltarget credit rating for the insurer; and electronically receiving thetarget rating based on the generated determination.

In one embodiment, the target credit rating is AAA, wherein theinvestment comprises an insured bond issued by an issuer, and the cashstream is produced from an insuring bond issued that is related to theinsured bond and that is issued by the issuer. In another embodiment,the investment comprises a previously issued bond issued by an issuer,and the cash stream is produced by an investment unrelated to the issuerand is used as insurance or re-insurance for the previously issued bond.

The system may also include a guarantor computer component configuredfor allocating the regulatory capital in the computer memory to anamount equal to a coverage factor multiplied by an average annualdepression scenario default percentage for the investment; and selectingby the computer system an investment criteria to invest the regulatorycapital to create an investment return. The system may also include atrust computer component configured for determining by the computersystem a portion of the capital structure for a pledged insuringinvestment that produces at least a portion of the cash stream; andsecuring a draw on sources of the regulatory capital based on theportion of the cash stream.

In one embodiment, the company computer component can be furtherconfigured for allocating the regulatory capital in the computer memoryto an amount equal to a coverage factor multiplied by an average annualdepression scenario default percentage for the investment; selecting bythe computer system an investment criteria to invest the regulatorycapital to create an investment return; determining by the computersystem a portion of the capital structure for a pledged insuringinvestment that produces at least a portion of the cash stream; andsecuring a draw on sources of the regulatory capital based on theportion of the cash stream.

In another embodiment, the system can further include a user interfacecomponent. The user interface component can be configured for receivinginput relating to the insured bond and the insuring bond to generate amodel of applying the insuring bonds to enhance the insured bond'scredit rating; providing a break-even comparison of applying establishedcapital structure to a monoline insurance of the insured bond;generating an indication of the determination of whether the establishedcapital structure is sufficient to cover the depression scenario periodto obtain the minimal target credit rating for the insurer; and sendinga message to the company computer system to establish the capitalstructure based on the model and the indication.

The invention also relates to a non-transitory processor readable mediumfor minimizing a financial risk associated with an anticipated value ofan investment, comprising processor readable instructions that whenexecuted by a processor causes the processor to perform actions. Theactions include establishing by an insurer a capital structure within acomputer memory of a computer system, the capital structure designed tominimize the risk and being structured with regulatory capital and acash stream that is pledged to fund a default associated with theinvestment; generating a determination of whether the establishedcapital structure is sufficient to cover a depression scenario period toobtain a minimal target credit rating for the insurer; andelectronically receiving the target rating based on the generateddetermination.

In a specific embodiment, a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool afirst credit having an obligation to make specified payments and asecond credit having an obligation to make specified payments, each ofthe first credit and second credit being in a non-default state when arespective obligation is met and being in a default state when arespective obligation is not met; associating a first senior holder anda first subordinate holder with the first credit using a) a respectivefirst senior holder financial instrument through which payments from thefirst credit flow to the first senior holder and b) a respective firstsubordinate holder financial instrument through which payments from thefirst credit flow to the first subordinate holder; associating a secondsenior holder and a second subordinate holder with the second creditusing a) a respective second senior holder financial instrument throughwhich payments from the second credit flow to the second senior holderand b) a respective second subordinate holder financial instrumentthrough which payments from the second credit flow to the secondsubordinate holder; structuring the first senior holder financialinstrument and the first subordinate holder financial instrument to givepriority to payments due the first senior holder prior to payments duethe first subordinate holder in the event the first credit enters thedefault state; using payments from the second subordinate holderfinancial instrument to perform the obligation of the first credit forthe benefit of the first senior holder to the extent that the firstcredit enters the default state and payments due the first senior holderare not available; and providing the second subordinate holder thebenefit of the obligation of the first credit to the extent thatpayments due the second subordinate holder were used to perform theobligation of the first credit.

This method may further include: structuring the second senior holderfinancial instrument and the second subordinate holder financialinstrument to give priority to payments due the second senior holderprior to payments due the second subordinate holder in the event thesecond credit enters the default state; using payments from the firstsubordinate holder financial instrument to perform the obligation of thesecond credit for the benefit of the second senior holder to the extentthat the second credit enters the default state and payments due thesecond senior holder are not available; and providing the firstsubordinate holder the benefit of the obligation of the second credit tothe extent that payments due the first subordinate holder were used toperform the obligation of the second credit.

Preferably, at least one of the first senior holder financialinstrument, the second senior holder financial instrument, the firstsubordinate holder financial instrument, the second subordinate holderfinancial instrument, the first credit, and the second credit mayinclude a bond. Also, at least one of the first credit and second creditmay include a credit of the type selected from a municipal credit, ahospital credit, an industrial credit, and a high-yield credit.

At least one of a) the step of providing the second subordinate holderthe benefit of the obligation of the first credit to the extent thatpayments due the second subordinate holder were used to perform theobligation of the first credit may be carried out through an assignmentand b) the step of providing the first subordinate holder the benefit ofthe obligation of the second credit to the extent that payments due thefirst subordinate holder were used to perform the obligation of thesecond credit may be carried out through an assignment. Alternatively,these steps may be carried out through subrogation, by providing arecovery value associated with second credit, or by providing aliquidation value associated with second credit.

Preferably, at least one of a) the first senior financial instrument andthe first subordinate financial instrument may be included in a firstmaster financial instrument and b) the second senior financialinstrument and the second subordinate financial instrument may beincluded in a second master financial instrument. At least one of thefirst master financial instrument and the second master financialinstrument generally form a series of bonds having a senior/subordinatestructure. Also, the transaction pool may comprise a trust.

In another embodiment, a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool ncredits, each of the credits having an obligation to make specifiedpayments and each of the credits being in a non-default state when arespective obligation is met and being in a default state when arespective obligation is not met; associating a senior holder and asubordinate holder with each of the credits using a) a respective seniorholder financial instrument through which payments from a respectivecredit flow to the senior holder and b) a respective subordinate holderfinancial instrument through which payments from a respective creditflow to the subordinate holder; structuring each senior holder financialinstrument and each subordinate holder financial instrument to givepriority to payments due each respective senior holder prior to paymentsdue each respective subordinate holder in the event a respective creditenters the default state; using payments from at least one subordinateholder financial instrument associated with a credit in the non-defaultstate to perform the obligation of a credit in the default state to theextent that payments due the senior holder associated with the credit inthe default state are not available; and providing each subordinateholder at least a portion of the benefit of the obligation of the creditin the default state to the extent that payments due each subordinateholder were used to perform the obligation of the credit in the defaultstate; wherein n is an integer in the range of 1 to 1000. In thisembodiment, the transaction pool may comprise a trust.

In yet another embodiment, a method of structuring risk in a financialtransaction is provided, including: allocating to a transaction pool afirst sub-pool containing a first credit having an obligation to makespecified payments and a second credit having an obligation to makespecified payments, each of the first credit and second credit being ina non-default state when a respective obligation is met and being in adefault state when a respective obligation is not met; allocating to thetransaction pool a second sub-pool containing a third credit having anobligation to make specified payments and a fourth credit having anobligation to make specified payments, each of the third credit andfourth credit being in a non-default state when a respective obligationis met and being in a default state when a respective obligation is notmet; associating a first senior holder and a first subordinate holderwith the first credit using a) a respective first senior holderfinancial instrument through which payments from the first credit flowto the first senior holder and b) a respective first subordinate holderfinancial instrument through which payments from the first credit flowto the first subordinate holder; associating a second senior holder anda second subordinate holder with the second credit using a) a respectivesecond senior holder financial instrument through which payments fromthe second credit flow to the first senior holder and b) a respectivesecond subordinate holder financial instrument through which paymentsfrom the second credit flow to the second subordinate holder;associating a third senior holder and a third subordinate holder withthe third credit using a) a respective third senior holder financialinstrument through which payments from the third credit flow to thethird senior holder and b) a respective third subordinate holderfinancial instrument through which payments from the third credit flowto the third subordinate holder; associating a fourth senior holder anda fourth subordinate holder with the fourth credit using a) a respectivefourth senior holder financial instrument through which payments fromthe fourth credit flow to the fourth senior holder and b) a respectivefourth subordinate holder financial instrument through which paymentsfrom the fourth credit flow to the fourth subordinate holder;structuring the first senior holder financial instrument and the firstsubordinate holder financial instrument to give priority to payments duethe first senior holder prior to payments due the first subordinateholder in the event the first credit enters the default state;structuring the second senior holder financial instrument and the secondsubordinate holder financial instrument to give priority to payments duethe second senior holder prior to payments due the second subordinateholder in the event the second credit enters the default state;structuring the third senior holder financial instrument and the thirdsubordinate holder financial instrument to give priority to payments duethe third senior holder prior to payments due the third subordinateholder in the event the third credit enters the default state;structuring the fourth senior holder financial instrument and the fourthsubordinate holder financial instrument to give priority to payments duethe fourth senior holder prior to payments due the fourth subordinateholder in the event the fourth credit enters the default state; usingpayments from the second subordinate holder financial instrument toperform the obligation of the first credit for the benefit of the firstsenior holder to the extent that the first credit enters the defaultstate and payments due the first senior holder are not available; usingpayments from at least one of the third subordinate holder financialinstrument and the fourth subordinate holder financial instrument toperform the obligation of the first credit for the benefit of the firstsenior holder to the extent that the payments of the second subordinateholder financial instrument used for the benefit of the first seniorholder do not cover the obligation of the first credit; providing eachof the third subordinate holder and the fourth subordinate holder thebenefit of the obligation of the first credit to the first senior holderto the extent that the payments of the third subordinate holderfinancial instrument and the fourth subordinate holder financialinstrument are used for the benefit of the first senior holder; andproviding the second subordinate holder the benefit of the obligation ofthe first credit to the first senior holder to the extent that paymentsof the second subordinate holder financial instrument were used toperform the obligation of the first credit and to the extent that abenefit exists after any benefit is provided the third subordinateholder and the fourth subordinate holder.

In this embodiment, all credits allocated to a particular sub-pool mayhave a substantially similar risk of entering the default state. Inparticular, the all credits allocated to a particular sub-pool may beselected from one of a traditional municipal credit, a hospital credit,an industrial corporate credit, and a high-yield credit. Preferably, thetransaction pool may comprise a trust.

The methods of the invention may also include structuring a transactionpool with n sub-pools; allocating to each of the sub-pools between j andk credits, each credit having an obligation to make specified paymentsand each credit being in a non-default state when a respectiveobligation is met and being in a default state when a respectiveobligation is not met; associating a senior holder and a subordinateholder with each of the credits using a) a respective senior holderfinancial instrument through which payments from the credit flow to thesenior holder and b) a respective subordinate holder financialinstrument through which payments from the credit flow to thesubordinate holder; structuring each senior holder financial instrumentand each subordinate holder financial instrument to give priority topayments due the respective senior holder prior to payments due therespective subordinate holder in the event the associated credit entersthe default state; using payments from each subordinate holder financialinstrument associated with credits within the same sub-pool as adefaulting credit to perform the obligation of the defaulting credit forthe benefit of the associated senior holder to the extent that paymentsdue the senior holder associated with the defaulting credit are notavailable; using payments from each subordinate holder financialinstrument associated with credits outside the sub-pool containing thedefaulting credit to perform the obligation of the defaulting credit forthe benefit of the associated senior holder to the extent that thepayments of each subordinate holder financial instrument associated withcredits within the same the sub-pool as the defaulting credit which wereused for the benefit of the senior holder do not cover the obligation ofthe first credit; providing each subordinate holder associated withcredits outside the sub-pool containing the defaulting credit thebenefit of the obligation of the defaulting credit to the associatedsenior holder to the extent that the payments due each subordinateholder associated with credits outside the sub-pool containing thedefaulting credit were used to perform the obligation of the defaultingcredit; and providing each subordinate holder associated with creditswithin the same sub-pool as the defaulting credit the benefit of theobligation of the defaulting credit to the associated senior holder tothe extent that payments due each subordinate holder associated withcredits within the same sub-pool as the defaulting credit were used toperform the obligation of the defaulting credit and to the extent that abenefit exists after any benefit is provided each subordinate holderassociated with credits outside the sub-pool containing the defaultingcredit; wherein n, j, and k are integers in the range of 1 to 1000.

Alternatively, the methods can include: structuring a transaction poolwith n sub-pools, each of the sub-pools containing between j and kmini-pools; allocating to each of the mini-pools between j and k creditsand allocating to each of the sub-pools between j and k credits, eachcredit having an obligation to make specified payments and each creditbeing in a non-default state when a respective obligation is met andbeing in a default state when a respective obligation is not met;associating a senior holder and a subordinate holder with each creditusing a respective senior holder financial instrument through whichpayments from the credit flow to the senior holder and a respectivesubordinate holder financial instrument through which payments from thecredit flow to the subordinate holder; structuring each senior holderfinancial instrument and each subordinate holder financial instrument togive priority to payments due the respective senior holder prior topayments due the respective subordinate holder in the event theassociated credit enters the default state; using payments from eachsubordinate holder financial instrument associated with credits withinthe same mini-pool as the defaulting credit to perform the obligation ofthe senior holder financial instrument associated with the defaultingcredit for the benefit of the senior holder to the extent that paymentsdue the senior holder associated with the defaulting credit are notavailable; using payments from each subordinate holder financialinstrument associated with credits outside the mini-pool with thedefaulting credit but within the same sub-pool as the defaulting creditto perform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that the payments of each subordinate holderfinancial instrument associated with credits within the same mini-poolas the defaulting credit which were used for the benefit of the seniorholder do not cover the obligation of the defaulting credit; usingpayments from each subordinate holder financial instrument associatedwith credits outside the sub-pool containing the defaulting credit toperform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that the payments of each subordinate holderfinancial instrument associated with credits within the same sub-pool asthe defaulting credit which were used for the benefit of the seniorholder do not cover the obligation of the defaulting credit; providingeach subordinate holder associated with credits outside the sub-poolcontaining the defaulting credit the benefit of the obligation of thedefaulting credit to the associated senior holder to the extent that thepayments due each subordinate holder associated with credits outside thesub-pool containing the defaulting credit were used to perform theobligation of the defaulting credit; providing each subordinate holderassociated with credits within the same sub-pool as the defaultingcredit the benefit of the obligation of the defaulting credit to theassociated senior holder to the extent that payments due eachsubordinate holder associated with credits within the same sub-pool asthe defaulting credit were used to perform the obligation of thedefaulting credit and to the extent that a benefit exists after anybenefit is provided each subordinate holder associated with creditsoutside the sub-pool containing the defaulting credit; and providingeach subordinate holder associated with credits within the samemini-pool as the defaulting credit the benefit of the obligation of thedefaulting credit to the associated senior holder to the extent thatpayments due each subordinate holder associated with credits within thesame mini-pool as the defaulting credit were used to perform theobligation of the defaulting credit and to the extent that a benefitexists after a) any benefit is provided each subordinate holderassociated with credits outside the sub-pool containing the defaultingcredit and b) after any benefit is provided each subordinate holderassociated with credits outside the mini-pool containing the defaultingcredit and within the sub-pool containing the defaulting credit; whereinn, j, and k are integers in the range of 1 to 1000. If desired, allcredits allocated to a particular mini-pool within a particular sub-poolmay be selected from a sub-category associated with the creditsallocated to the particular sub-pool.

In another embodiment, a method of structuring risk in a financialtransaction is provided, comprising: allocating to a trust a firstissuer credit having an obligation to make specified payments and asecond issuer credit having an obligation to make specified payments,each of the first issuer credit and second issuer credit being in anon-default state when a respective obligation is met and being in adefault state when a respective obligation is not met; associating afirst senior holder and a first subordinate holder with the first issuercredit using a) a respective first senior holder trust instrumentthrough which payments from the first issuer credit flow to the firstsenior holder and b) a respective first subordinate holder trustinstrument through which payments from the first issuer credit flow tothe first subordinate holder; associating a second senior holder and asecond subordinate holder with the second issuer credit using a) arespective second senior holder trust instrument through which paymentsfrom the second issuer credit flow to the second senior holder and b) arespective second subordinate holder trust instrument through whichpayments from the second issuer credit flow to the second subordinateholder; structuring the first senior holder trust instrument and thefirst subordinate holder trust instrument to give priority to paymentsdue the first senior holder prior to payments due the first subordinateholder in the event the first issuer credit enters the default state;using payments from the second subordinate holder trust instrument toperform the obligation of the first issuer credit for the benefit of thefirst senior holder to the extent that the first issuer credit entersthe default state and payments due the first senior holder are notavailable; and providing the second subordinate holder the benefit ofthe obligation of the first issuer credit to the extent that paymentsdue the second subordinate holder were used to perform the obligation ofthe first issuer credit. In this embodiment, at least one of the firstsenior holder trust instrument, the first subordinate holder trustinstrument, the second senior holder trust instrument, and the secondsubordinate holder trust instrument may be a bond issued by the trust.

In yet another embodiment, a method of structuring risk in a financialtransaction is provided, comprising: allocating to a trust an issuercredit having an obligation to make specified payments, wherein theissuer credit is in a non-default state when the obligation is met andis in a default state when the obligation is not met; associating asenior holder and a subordinate holder with the issuer credit using a) asenior holder trust instrument through which payments from the issuercredit flow to the senior holder and b) a subordinate holder trustinstrument through which payments from the issuer credit flow to thesubordinate holder; and structuring the senior holder trust instrumentand the subordinate holder trust instrument to give priority to paymentsdue the senior holder prior to payments due the subordinate holder inthe event the issuer credit enters the default state. Preferably, atleast one of the senior holder trust instrument and the subordinateholder trust instrument is a bond issued by the trust.

The present invention provides for what will hereinafter be referred toas the Tranche Subordinated Bond approach (or “TSB” approach), whereineach senior and subordinate holder is primarily exposed to a particularidentified (“related”) credit and only secondarily exposed to the impactof a default of any other (“unrelated”) credit. This is achieved bytranching each individual credit as well by creating a pool of credits.In other words, each senior TSB holder is primarily exposed to (andperhaps even owns an interest in) a particular credit of the pool. Thesenior TSB holder cannot be affected by any underlying default except adefault on its related credit and only if the amount of the defaultexceeds the amount of the subordinate TSBs related to the sameunderlying credit. It is believed that this should also have the benefitof avoiding concentration and capacity problems for holders of seniorTSBs, analogous to bond insurance for which holder capacity is based onthe underlying credit. If a default exceeds the amount of the relatedsubordinate TSBs (i.e., the subordinate TSBs that are primarily exposedto the same underlying credit), then amounts payable to the holders ofunrelated subordinate TSBs would be applied to make the holders of therelated senior TSBs whole and the unrelated subordinate TSB holderswould become owners of or become subrogated to the claim of the relatedsenior TSB holders.

If the amount of the senior TSBs is less than the expected recoveryvalue in the event of a default of the underlying credit, then theunrelated subordinate TSB holders would be exposed to a temporarynon-payment (“timing risk”) but not to a permanent non-payment(“ultimate payment risk”) in the event of a default on the underlyingcredit since unrelated subordinate holders would be reimbursed fromrecovery value when it is realized. Another characteristic of the TSBapproach is that the amount of senior TSBs created may be limited toincrease the likelihood that a payment default could be fully absorbedby the holders of the related subordinate TSB holders. Consequently,there may be an intermediate tranche which is in effect a pass-throughof the underlying credit with neither the benefit nor burden of thetranching of the pool. In one example, the intermediate tranche wouldhave the identical credit characteristics of the related underlyingcredit, with the possible exception that all of the recovery value ofthe loan may be devoted first to amounts due to the related senior TSBs(including such amounts to which unrelated subordinate TSBs have becomesubrogated).

Thus, when a new credit is added to the pool or the amount of anexisting credit is increased, the risk to the unrelated subordinated TSBholders can be minimized, first, because the first loss is borne byholders of the related subordinate TSBs and, second, because the risk tothe unrelated subordinate TSB holders is essentially timing risk ratherthan ultimate payment risk. Credits could be added to the pool either atthe behest of an issuer or by a holder of an underlying credit. Thisapproach could be targeted toward credits that in fact are directly heldin the public debt markets such as investment grade rated credits orhigh-yield credits that are directly held by institutional buyers. Bothultimate payment risk and timing risk to unrelated subordinate TSBholders could effectively be eliminated through the use of sub-poolsand/or mini-pools as described below.

To further reduce the risk to holders of unrelated subordinate TSBs, itmay be desirable to create sub-pools within the larger pool where thenature of the risk to subordinate TSB holders within the sub-pool issimilar. For example, traditional municipal credits, hospital credits,industrial corporate credits, and high-yield credits (includingmunicipal) might be separated. Also, credits of a particular ratingcategory might be separated from credits of a different rating category.It is believed that the senior TSBs within the sub-pool should be ableto independently achieve high-grade ratings. To maximize the creditbenefit to all senior TSBs, however, all senior TSBs could ultimately besecured by all subordinate TSBs. To further insulate subordinate TSBholders from risk associated with a different sub-pool, the method canrequire that, in order to combine sub-pools, the senior TSBs within eachsub-pool must meet a specified rating standard (e.g., triple-A) withoutthe benefit of any cross-subsidization from any other sub-pool. Hence,no subordinate TSB from a different pool would be affected unless acredit that is triple-A on its own (the senior TSBs within the othersub-pool) would default without the benefit of the cross-subsidization.This reduces the risk to each subordinate TSB holder from credits thatare qualitatively different, while maintaining the benefit to the seniorTSBs of having the largest and most diverse possible pool of subordinateTSBs securing the senior TSBs.

From a credit and disclosure perspective, it is believed that animportant factor to a senior TSB holder are the quality of theunderlying credit (which the TSB holder is explicitly choosing) and thequality of the credit enhancement provided by the entire pool. Given thediversity of the pool, it is believed that it would be unnecessary toprovide disclosure on any particular credit. In any case, it is likelythat all of the underlying credits would be registered or otherwise havepublicly available disclosure that could be incorporated by reference.The ability to identify each underlying credit and incorporateddisclosure by reference could be important to providing adequatedisclosure to subordinated TSB holders who are on a secondary ortertiary basis exposed to credits across the pool. It is believed,however, that the relevant disclosure on an unrelated sub-pool should beno more than would be required for the senior tranche of a stand alonepool (since no subordinate TSB holder would be affected by a default ona credit within an unrelated pool unless the senior tranche wouldotherwise default), which for a large and diverse pool would be astandard disclosure only.

Alternatively, for a particular type of credit where sub-poolsrepresenting different rating categories are provided, the integrity ofthe sub-pools could be maximized in the event of a downgrade of therating of an underlying credit by transferring the credit from thehigher rated sub-pool to the lower rated sub-pool. This should notmaterially affect the holders of the related senior TSBs since they aresecured by the whole pool. It is believed that this may slightlydisadvantage the holders of the related subordinate TSBs in that theywould be exposed to secondary risk related to an underlying default inthe lower rated sub-pool. However, it would impose on the subordinateTSB holder who chose the credit the full burden of the creditdeterioration rather than sharing it with the holders of unrelatedsubordinate TSBs within the higher rated sub-pool. The holders in thesub-pool to which the credit is transferred would not be hurt sincetheir exposure would be no different than that related to adding anyother qualifying credit to the sub-pool. Similarly, if an underlyingcredit has its rating increased, that credit could be transferred to thehigher rated sub-pool for that credit type. For the same reasons as juststated, there would be no detriment to the holders in the sub-pool towhich the credit is transferred and the transfer would give the holderof the transferred subordinate TSB the full benefit of the appreciationof the credit.

Any actual default would be primarily the responsibility of thesubordinate TSB holders in the related sub-pool (and their transferees)at the time of the default and secondarily the responsibility of theunrelated subordinate TSB holders within the pool. Alternatively, theprogram manager could at some earlier point identify a troubled creditas the responsibility of the subordinate TSB holders as of that date(and their transferees). Thus, a problem with a particular credit can beisolated so as not to affect the ability to add other credits to thepool. Otherwise, a troubled credit could disincentivize potentialsubordinated TSB holders from participating in the related pool since aloss on that credit would be shared by the new subordinated TSB holder.

In a further embodiment, for credits without significant recoveryvalues, such as credits in bankruptcy which may or may not haveliquidation values (for which it is impossible to eliminate ultimatepayment risk by tranching an individual credit), or simply to eliminatetiming risk to unrelated TSBs, or to increase the proportion of thesecurities that can be converted into senior TSBs, it may be necessaryor desirable for the subordinate TSB structure to be based on groups ofunderlying credits (e.g., a “mini-pool”) rather than a single underlyingcredit. The structure of a mini-pool would be similar to that of asub-pool in that any default within the pool would first be borne by theholders of the subordinate TSBs within the mini-pool before the holdersof any unrelated subordinate TSBs would be affected. Each mini-poolmight contain credits of a particular sub-category of the type ofcredits in the corresponding sub-pool (e.g., credits related to aparticular industry, such as telecommunications). The senior TSBsrelated to a mini-pool could still be based on individual credits ratherthan on the mini-pool of credits. The test for addition of a mini-poolto a sub-pool could be significantly less rigorous than the test foraddition of a sub-pool to the pool. It may only be necessary that theultimate payment risk and/or timing risk to holders of unrelatedsubordinate TSBs be made comparable to the risk posed by each otherunderlying credit or pool of mini-credits within the sub-pool.

Using the TSB approach, an institutional holder (e.g., a pension fund)could create high-grade, credit enhanced, more liquid senior TSBsrelated to either individual securities or a mini-pool of securitiesthat it holds. As the pool gets larger, the credit quality of the seniorTSBs would increase (or at least the probability of any non-paymentwould get less and less). It is further believed that the result for thesenior TSBs would be similar to adding bond insurance to municipalbonds: a) an increase in price or b) a decrease in market yield.Alternatively, rather than being reflected in the price of the seniorTSBs, the economic benefit of the TSB structure could be reflected in ahigher retained yield on the subordinate TSBs.

Referring now to FIG. 1, a flowchart showing a method according to anembodiment of the invention is shown. As seen in this FIG. 1, Pool 101contains First Credit 103. First Credit 103, which includes anobligation to make specified payments, can be in a non-default state ifthe obligation is met or a default state if the obligation is not met.First Senior Holder 105 is associated with First Credit 103 using FirstSenior Holder Financial Instrument 107, through which payments flow fromFirst Credit 103 to First Senior Holder 105. First Subordinate Holder109 is associated with First Credit 103 using First Subordinate HolderFinancial Instrument 111, through which payments flow from First Credit103 to First Subordinate Holder 109. First Senior Holder FinancialInstrument 107 and First Subordinate Holder Financial Instrument 111 maybe structured to provide for the priority of payments from First Credit103 to First Senior Holder 105 prior to payments from First Credit 103to First Subordinate Holder 109.

Pool 101 also contains Second Credit 113. Second Credit 113, whichincludes an obligation to make specified payments, can be in anon-default state if the obligation is met or a default state if theobligation is not met. Second Senior Holder 115 is associated withSecond Credit 113 using Second Senior Holder Financial Instrument 117,through which payments flow from Second Credit 113 to Second SeniorHolder 115. Second Subordinate Holder 119 is associated with SecondCredit 113 using Second Subordinate Holder Financial Instrument 121,through which payments flow from Second Credit 113 to Second SubordinateHolder 119. Second Senior Holder Financial Instrument 117 and SecondSubordinate Holder Financial Instrument 121 may be structured to providefor the priority of payments from Second Credit 113 to Second SeniorHolder 115 prior to payments from Second Credit 113 to SecondSubordinate Holder 119.

In the event that First Credit 103 enters the default state any paymentsavailable from First Credit 103 are first applied to First Senior Holder105 (at the expense of First Subordinate Holder 109). To the extent thatthe payments to First Senior Holder 105 are still not sufficient tocover the obligation of First Credit 103 then payments due SecondSubordinate Holder 119 are used to cover the obligation to First SeniorHolder 105 (this is shown by the dashed line marked A in FIG. 2).Further, to the extent that any benefit remains in the obligation ofFirst Credit 103 to First Senior Holder 105 then Second SubordinateHolder 119 is provided such remaining benefit (this is shown by thedashed line marked B in FIG. 2).

Of course, if Second Credit 113 enters the default state rather thanFirst Credit 103 an analogous operation is carried out with regard toFirst Subordinate Holder 109, Second Senior Holder 115, and SecondCredit 113.

Referring now to FIG. 2, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 1 and elements of FIG. 1 correspondingto elements of FIG. 2 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 1 and 2 is that inthe embodiment of FIG. 2 the First Senior Holder Financial Instrument207 and the First Subordinate Holder Financial Instrument 211 areincluded within a First Master Financial Instrument 223 and the SecondSenior Holder Financial Instrument 217 and the Second Subordinate HolderFinancial Instrument 221 are included within a Second Master FinancialInstrument 225 The two embodiments otherwise operate in a similarmanner.

Referring now to FIG. 3, a flowchart showing a method according toanother embodiment of the invention is shown. As seen in this Fig., Pool301 contains First Credit 303, Second Credit 305, Third Credit 307, andFourth Credit 309. First Credit 303 and Second Credit 305 are includedwithin First Sub-Pool 311 and Third Credit 307 and Fourth Credit 309 areincluded within Second Sub-Pool 313. Each of First Credit 303, SecondCredit 305, Third Credit 307, and Fourth Credit 309 includes anobligation to make specified payments and each of First Credit 303,Second Credit 305, Third Credit 307, and Fourth Credit 309 can be in anon-default state if a respective obligation is met or a default stateif the obligation is not met.

First Senior Holder 315 is associated with First Credit 303 using FirstSenior Holder Financial Instrument 317, through which payments flow fromFirst Credit 303 to First Senior Holder 315. First Subordinate Holder319 is associated with First Credit 303 using First Subordinate HolderFinancial Instrument 321, through which payments flow from First Credit303 to First Subordinate Holder 319. First Senior Holder FinancialInstrument 317 and Second Senior Holder Financial Instrument 321 may bestructured to provide for the priority of payments from First Credit 303to First Senior Holder 315 prior to payments from First Credit 303 toFirst Subordinate Holder 319.

Further, as shown in FIG. 3, each of second through fourth SeniorHolders and Subordinate Holders are associated with respective Creditsthrough respective Financial Instruments. The various FinancialInstruments may be structured as described above with reference to thepriority of payments between corresponding Senior Holders andSubordinate Holders.

In the event that First Credit 303 enters the default state any paymentsavailable from First Credit 303 are first applied to First Senior Holder315 (at the expense of First Subordinate Holder 319). To the extent thatthe payments to First Senior Holder 315 are still not sufficient tocover the obligation of First Credit 303 then payments due SecondSubordinate Holder 327 are used to cover the obligation to First SeniorHolder 315 (this is shown by the dashed line marked A in FIG. 3).

Further, to the extent that the payments to First Senior Holder 315which had been due Second Subordinate Holder 327 are insufficient tofulfill the obligation of First Credit 303 the payments due ThirdSubordinate Holder 335 and Fourth Subordinate Holder 343 may be used(shown by the dashed lines marked C and D in FIG. 3). Thereafter, to theextent that any benefit remains in the obligation of First Credit 303 toFirst Senior Holder 315, and to the extent that payments due ThirdSubordinate Holder 335 and Fourth Subordinate Holder 343 had beendirected to First Senior Holder 315, Third Subordinate Holder 335 andFourth Subordinate Holder 343 are provided such remaining benefit (thisis shown by the dashed lines marked E and F in FIG. 3). Finally, to theextent that any benefit remains in the obligation of First Credit 303 toFirst Senior Holder 315 after Third Subordinate Holder 335 and FourthSubordinate Holder 343 have been made whole, Second Subordinate Holder327 is provided such remaining benefit (this is shown by the dashed linemarked B in FIG. 3).

Of note is the fact that the operation of Sub-Pool 311 is similar to theoperation of Pool 101 of FIG. 1. Also of note is the fact that anyremaining benefit may not be applied to Second Subordinate Holder 327(associated with a Credit in the same Sub-Pool as the defaulting Credit)until Third Subordinate Holder 335 and Fourth Subordinate Holder 343(associated with a Credit in a different Sub-Pool than the defaultingCredit) have been made whole. In another example, if a Credit other thanFirst Credit 303 enters the default state then an analogous operation iscarried out with regard to each Subordinate Holder, each Senior Holder,and each Credit.

Referring now to FIG. 4, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 3 and elements of FIG. 3 correspondingto elements of FIG. 4 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 3 and 4 is that inthe embodiment of FIG. 4 each associated Senior Holder FinancialInstrument and Subordinate Holder Financial Instrument is includedwithin a Master Financial Instrument. The two embodiments otherwiseoperate in a similar manner.

Referring now to FIG. 5, a flowchart showing a method according toanother embodiment of the invention is shown. As seen in this Fig., Pool501 contains First Credit 503, Second Credit 505, Third Credit 507,Fourth Credit 509 and Fifth Credit 511. Second Credit 505 and ThirdCredit 507 are included within Mini-Pool 512 which in turn is includedwithin First Sub-Pool 513. First Credit 503 is also included withinFirst Sub-Pool 513. Further, Fourth Credit 509 and Fifth Credit 511 areincluded within Second Sub-Pool 515. Each of First Credit 503, SecondCredit 505, Third Credit 507, Fourth Credit 509 and Fifth Credit 511includes an obligation to make specified payments and each of FirstCredit 503, Second Credit 505, Third Credit 507, Fourth Credit 509 andFifth Credit 511 can be in a non-default state if a respectiveobligation is met or a default state if the obligation is not met.

First Senior Holder 517 is associated with First Credit 503 using FirstSenior Holder Financial Instrument 519, through which payments flow fromFirst Credit 503 to First Senior Holder 517. First Subordinate Holder521 is associated with First Credit 503 using First Subordinate HolderFinancial Instrument 523, through which payments flow from First Credit503 to First Subordinate Holder 521. First Senior Holder FinancialInstrument 519 and First Subordinate Holder Financial Instrument 523 maybe structured to provide for the priority of payments from First Credit503 to First Senior Holder 517 prior to payments from First Credit 503to First Subordinate Holder 521.

Further, as shown in FIG. 5, each of second through fifth Senior Holdersand Subordinate Holders are associated with respective Credits throughrespective Financial Instruments. The various Financial Instruments maybe structured as described above with reference to the priority ofpayments between corresponding Senior Holders and Subordinate Holders.

In the event that Second Credit 505 enters the default state anypayments available from Second Credit 505 are first applied to SecondSenior Holder 525 (at the expense of Second Subordinate Holder 529). Tothe extent that the payments to Second Senior Holder 525 are still notsufficient to cover the obligation of Second Credit 505, payments dueThird Subordinate Holder 537 are used to cover the obligation to SecondSenior Holder 525 (this is shown by the dashed line marked A in FIG. 5).Further, to the extent that the payments to Second Senior Holder 525which had been due Third Subordinate Holder 537 are insufficient tofulfill the obligation of Second Credit 505, payments due FirstSubordinate Holder 521 may be used (shown by the dashed line marked C inFIG. 5).

Further still, to the extent that the payments to Second Senior Holder525 which had been due First Subordinate Holder 521 are insufficient tofulfill the obligation of Second Credit 505, payments due FourthSubordinate Holder 545 and Fifth Subordinate Holder 553 may be used(shown by the dashed lines marked E and F in FIG. 5).

Thereafter, to the extent that any benefit remains in the obligation ofSecond Credit 505 to Second Senior Holder 525, and to the extent thatpayments due Fourth Subordinate Holder 545 and Fifth Subordinate Holder553 had been directed to Second Senior Holder 525, Fourth SubordinateHolder 545 and Fifth Subordinate Holder 553 are provided such remainingbenefit (this is shown by the dashed lines marked G and H in FIG. 5).Next, to the extent that any benefit remains in the obligation of SecondCredit 505 to Second Senior Holder 525 after Fourth Subordinate Holder545 and Fifth Subordinate Holder 553 have been made whole, and to theextent that payments due First Subordinate Holder 521 had been directedto Second Senior Holder 525, First Subordinate Holder 521 is providedsuch remaining benefit (this is shown by the dashed line marked D inFIG. 5).

Finally, to the extent that any benefit remains in the obligation ofSecond Credit 505 to Second Senior Holder 525 after First SubordinateHolder 521, Fourth Subordinate Holder 545 and Fifth Subordinate Holder553 have been made whole, Third Subordinate Holder 537 is provided suchremaining benefit (this is shown by the dashed line marked B in FIG. 5).

Of note is the fact that the operation of Mini-Pool 512 is similar tothe operation of both Sub-Pool 311 of FIG. 3 and Pool 101 of FIG. 1.Also of note is the fact that: a) any remaining benefit may not beapplied to Third Subordinate Holder 537 (which is associated with aCredit in the same Mini-Pool as the defaulting Credit) until FirstSubordinate Holder 521 (which is associated with a Credit outside theMini-Pool with the defaulting Credit) has been made whole; and b) anyremaining benefit may not be applied to First Subordinate Holder 521(which is associated with a Credit in the same Sub-Pool as thedefaulting Credit) until Fourth Subordinate Holder 545 and FifthSubordinate Holder 553 (which are associated with Credits outside theSub-Pool with the defaulting Credit) have been made whole.

Of course, if a Credit other than Second Credit 505 enters the defaultstate then an analogous operation is carried out with regard to eachSubordinate Holder, each Senior Holder, and each Credit.

Referring now to FIG. 6, a flowchart showing a method according toanother embodiment of the present invention is shown. This embodiment issimilar to the embodiment of FIG. 5 and elements of FIG. 5 correspondingto elements of FIG. 6 will not be described again in detail. Theprinciple difference between the embodiments of FIGS. 5 and 6 is that inthe embodiment of FIG. 6 each associated Senior Holder FinancialInstrument and Subordinate Holder Financial Instrument is includedwithin a Master Financial Instrument. The two embodiments otherwiseoperate in a similar manner.

Referring now to FIG. 7, a block diagram of a software program accordingto another embodiment of the present invention is shown. As seen in thisFig., Software Program 701 includes: 1) Database Module 703 for storingdata concerning each credit, each senior holder, each subordinateholder, each senior holder financial instrument, each subordinate holderfinancial instrument, the transaction pool, each sub-pool, and eachmini-pool; 2) Allocation Module 705 for allocating sub-pools to thetransaction pool, for allocating mini-pools to each of the sub-pools,and for allocating credits to each of the mini-pools, sub-pools, andtransaction pool; 3) Association Module 707 for associating a seniorholder and a subordinate holder with each of the credits by associatinga) a senior holder with a respective senior holder financial instrumentthrough which payments from a respective credit flow to the seniorholder and b) a subordinate holder with a respective subordinate holderfinancial instrument through which payments from a respective creditflow to the subordinate holder; and 4) Crediting Module 709 for: i)crediting payments from each subordinate holder financial instrumentassociated with credits within the same mini-pool as a defaulting creditto perform the obligation of the senior holder financial instrumentassociated with the defaulting credit for the benefit of the seniorholder to the extent that payments due the senior holder associated withthe defaulting credit are not available; ii) crediting payments fromeach subordinate holder financial instrument associated with creditsoutside the mini-pool with the defaulting credit but within the samesub-pool as the defaulting credit to perform the obligation of thesenior holder financial instrument associated with the defaulting creditfor the benefit of the senior holder to the extent that the payments ofeach subordinate holder financial instrument associated with creditswithin the same mini-pool as the defaulting credit which were used forthe benefit of the senior holder do not cover the obligation of thedefaulting credit; iii) crediting payments from each subordinate holderfinancial instrument associated with credits outside the sub-poolcontaining the defaulting credit to perform the obligation of the seniorholder financial instrument associated with the defaulting credit forthe benefit of the senior holder to the extent that the payments of eachsubordinate holder financial instrument associated with credits withinthe same sub-pool as the defaulting credit which were used for thebenefit of the senior holder do not cover the obligation of thedefaulting credit; iv) crediting each subordinate holder associated withcredits outside the sub-pool containing the defaulting credit with thebenefit of the obligation of the defaulting credit to the associatedsenior holder to the extent that the payments due each subordinateholder associated with credits outside the sub-pool containing thedefaulting credit were used to perform the obligation of the defaultingcredit; v) crediting each subordinate holder associated with creditswithin the same sub-pool as the defaulting credit with the benefit ofthe obligation of the defaulting credit to the associated senior holderto the extent that payments due each subordinate holder associated withcredits within the same sub-pool as the defaulting credit were used toperform the obligation of the defaulting credit and to the extent that abenefit exists after any benefit is provided each subordinate holderassociated with credits outside the sub-pool containing the defaultingcredit; and vi) crediting each subordinate holder associated withcredits within the same mini-pool as the defaulting credit with thebenefit of the obligation of the defaulting credit to the associatedsenior holder to the extent that payments due each subordinate holderassociated with credits within the same mini-pool as the defaultingcredit were used to perform the obligation of the defaulting credit andto the extent that a benefit exists a) after any benefit is providedeach subordinate holder associated with credits outside the sub-poolcontaining the defaulting credit and b) after any benefit is providedeach subordinate holder associated with credits outside the mini-poolcontaining the defaulting credit and within the sub-pool containing thedefaulting credit.

Referring now to FIG. 8, a block diagram of a system according toanother embodiment of the present invention is shown. As seen in thisfigure, Computer 801 includes Memory 803 for storing a software program(not shown) and CPU 805 for processing the software program. Monitor807, Keyboard 809, Mouse 811, and Printer 813 are connected to Computer801 to provide user input/output. The software program stored in Memory803 and processed by CPU 805 may of course be the software program ofthe present invention. In any case, the details of each of Computer 801,Memory 803, CPU 805, Monitor 807, Keyboard 809, Mouse 811, and Printer813 are well known to those of ordinary skill in the art and will not bediscussed further.

Referring now to yet another embodiment of the present invention, credittranches may be created by having an issuer's bonds (hereinafter “IssuerBonds” or “IBs”) deposited in a trust which in turn issues variousclasses of securities (hereinafter “Trust Bonds” or “TBs”). Such TrustBonds may be related to the Issuer Bonds and may be issued to the publicand/or to any other appropriate group. It is believed that this approachmay work to permit credit tranching for securities, such as GeneralObligations, for which the issuer may not have authority to createtranches directly. In the event of a payment of less than all of theamount due on the Issuer Bond(s), the entire amount received on theIssuer Bond(s) would go first to secure payment of debt service on therelated senior Trust Bond(s) with any balance going to pay the debtservice on the subordinate Trust Bond(s). FIG. 9 shows a diagram of sucha flow of funds (debt service is abbreviated as “D/S” in this Figure).

In one example of the present embodiment the terms of the Trust Bonds,such as, for example, amount, payment dates, and redemption provisions,but excluding interest rates, would substantially mirror the provisionsof the related Issuer Bond(s).

For any Issuer Bond(s) for which there is express provision for theapplication of available monies to pay debt service in the event of ashortfall, in one example, this approach may create high grade credittranches and/or credit tranches with high coverage.

It is noted that outside of the housing sector, senior bonds aretraditionally assigned only a slightly higher rating than thesubordinate bonds. This suggests that either: i) there is still aperceived risk that notwithstanding the provisions for apportionment ofmonies in the event of a shortfall, no payment will be made; or ii) theportion of an issue that could be assigned a high grade rating using thetraditional senior/subordinate approach is significantly smallergenerally than is the case in housing. A possible explanation is thatthe percentage change in the revenues of the issuer necessary to resultin a non-payment of the senior bonds is not sufficiently different fromthat necessary to cause a non-payment of the subordinate bonds toprovide a materially higher level of protection. However, for issuerswith a heavy debt burden, it is believed that the difference should bematerial.

With respect to the risk of non-payment, in the case of Issuer Bondsaccording to the present invention which are secured by a net revenuepledge, the other creditors are provided for prior to the payment of anydebt service. So, given an explicit provision on the allocation of fundsin the event of an insufficiency, the risk of non-payment should beinsignificant. Consequently, a gross pledge of revenues may present agreater risk that there could be a period of non-payment while a courtdetermines how much gets applied to the cost of operations. Even so, therisk to the senior Trust Bonds would predominantly be with respect tothe timing of payment rather than with respect to payment itself.

In this regard, one method of reducing the timing risk to the senior TBswould be to find a reserve for them as soon as a payment defaultoccurred on the IBs and prior to the payment of debt service on thesubordinate TBs. This process would effectively result in application ofthe entire reserve (hereinafter “debt service reserve fund”, or “DSRF”)to secure the senior TBs and, for a typical situation, provideprotection with respect to timeliness of payment for a period of, forexample, 1.5 to 2 years (depending on the proportion of senior TBs). Ofnote is the fact that there may be tax issues with respect to the use ofthe reserve in this manner. Also, the aforementioned approach of fundinga reserve would increase the probability of an actual non-payment withrespect to the subordinate TBs (since they would not get any benefitfrom the DSRF).

If no special reserve is created for the senior TBs, then there issubstantially no difference in the probability of a non-payment eventbetween the Issuer Bonds and the Trust Bonds. However, in the event of anon-payment event, the severity of the non-payment event is more severefor the subordinate TBs than for the IBs, and less severe for the seniorTBs.

Referring now to yet another embodiment of the present invention, anapproach which addresses concerns regarding the timeliness of payment ofsenior TBs may be accomplished as follows: pool together two or moreIssuer Bond credits such that amounts available after payment of thesenior TBs for each credit are used to secure the payment of the othersenior TBs in the event that the amounts received for payment of therelated Issuer Bonds are not sufficient to pay the senior TBs. In otherwords, payments allocable to each series of subordinate TBs are appliedfirst, to the extent needed, to pay unpaid amounts on any of the seniorTBs. FIG. 10 shows a diagram of the credit structure of such an approach(debt service is abbreviated as “D/S” in this Figure).

In one example, the following discussion of the aforementioned poolingapproach assumes that substantially equal amounts of bonds are issuedfor each credit, that the bonds are issued substantially simultaneously,and that the bonds are payable on substantially the same dates.

In any case, it is noted that if the ratio of senior to subordinate TBsis 2-to-1 (i.e., 66% senior TBs), then the senior TBs of each credit arefully secured by the sum of the amounts allocable to the subordinatetranches for the other two credits. However, the ratio of total seniorobligations to the total amounts securing them is 1 to 1.33.

Further, if the ratio of senior to subordinate TBs is 1-to-1 (i.e., 50%senior TBs), the senior TBs of each credit are over-collateralized 2×.by the sum of the amounts allocable to the subordinate tranches for theother two credits. Also, the ratio of total senior obligations to thetotal amounts securing them is 1 to 2.

Applying the principles typically applicable to two-party-paysituations, the senior TBs should be rated from A to triple-A, dependingon such criteria as the percentage of senior debt, the strength of theunderlying credits, and the degree of correlation between the underlyingcredits. Each of the senior TB tranches would have both: i) anunderlying rating determined on the basis of the tranching of theindividual credit; and ii) an enhanced rating based on the impact ofpooling.

On the other hand, each of the subordinate TBs could be rated as low asthe weakest rating (without regard to pooling) of any of the senior TBtranches. The credit impact of the proposed structure on the subordinateTBs could be mitigated by: i) first applying amounts related to the sameunderlying credit; and ii) then applying amounts securing the weakest ofthe other underlying credits (thereby reducing the possibility that thesubordinate TBs related to the stronger underlying credit would beaffected).

In one example, if the senior tranches can achieve at least double-Acategory ratings, it is believed that the savings from this structurecould accrue both from lower interest rates on the senior bonds as wellas from the avoided cost of bond insurance on the senior bonds. Thosesavings would be reduced in part by any increase in yield necessary tomarket the subordinate TBs and by any increase in the costs of bondinsurance. However, the net benefit could be used to reduce the issuer'scost of funds.

Further, it is noted with regard to the present example that if theunderlying ratings of all three credits are the same, the subordinateTBs would arguably have the same ratings as the Issuer Bonds while thesenior TBs should receive significantly higher ratings. As mentionedearlier, the probability of a non-payment event would be substantiallythe same for both the Issuer Bonds and the subordinate TBs. However, ifsuch an event did occur, the severity of the event could be greater forthe subordinate TBs. (This runs counter to the idea that the issuerwould not make any payment in the event of a shortfall).

A specific example of a pooled Trust Bond embodiment of the presentinvention will now be described with reference to the credit tranchingand pooling of three New York City credits. More particularly, thediscussion will be a simplified analysis of the credit tranching andpooling of the General Obligation credit (“NYCGO”), the Municipal WaterFinance Authority (“NYCWFA”), and the Transitional Finance Authority(“NYCTFA”).

In one example, the analysis assumes that the MOODYS, STANDARD & POORS,and FITCH ratings of the bonds secured by the credits are as shown inTable 1:

TABLE 1 NYCWFA NYCGO NYCTFA MOODYS A1 A3 Aa3 STANDARD & POORS A A− AAFITCH AA− A− AA+

Moreover, the analysis assumes that the pool includes two-thirds seniorand one-third subordinate TBs. Therefore, as long as not more than onecredit defaults at any time, the defaulting senior Trust Bonds will befully secured by amounts allocable to the subordinate TBs of the othertwo credits. Also, the credit tranching within each credit providesprotection except during any period in which the issuer is making nopayments on that credit. In essence, the only time that there could be aproblem with payment of the senior TBs in this example would be in thesituation where the City (i.e., the credit issuing entity) wassimultaneously making no payments on two of the three credits.

Accordingly, it is believed that even though the TBs are not fullycovered by the obligations of two parties, given: i) the low correlationamong the three credits (other than with respect to general economicconditions); and ii) the fact that the diversification of the creditsand credit tranching would allow the structure to accommodatesignificant simultaneous payment shortfalls (up to 50%) with respect totwo credits without a non-payment of senior TBs, application of thetwo-party pay criteria in assessing the impact of the structure on theratings of the senior Trust Bonds should be appropriate.

Note that for each senior TB to be fully secured by two credits, thesenior TBs could not exceed 50% of each series. Given the ratings of thethree NYC credits, a literal application of the two-party pay criteriawould result in triple-A ratings on two-thirds of the senior Trust Bondsand double-A ratings on the remaining third. As in the case of the 66%senior TBs, the structure cannot withstand total non-payment of two ofthe credits at the same time. With 50% senior bonds, the structure couldwithstand a simultaneous 75% payment shortfall by two of the credits.However, this would result in a structure having a larger amount ofsubordinate TBs. Minimizing the amount of subordinate TBs is important(unless the underlying credits all have the same or very similarratings) since the rating of the subordinate TBs may be the lowestcommon denominator of the three credits. Minimizing the amount ofsubordinate TBs also spreads the benefit of the higher ratings on thesenior tranche across a larger amount of bonds.

Applying, for example, MOODY's two-party pay criteria to the scenariowith two-thirds senior bonds results in the senior TB ratings indicatedin FIG. 11 (debt service is abbreviated as “D/S” in this Figure). Thetwo-party pay criteria were applied assuming a medium correlation amongthe credits. Further, for each senior TB series, the two-party paycriteria were applied using the related underlying credit together withthe weakest of the other two credits.

Interestingly, given the Trust Bond ratings in this example, the Citywould be selling substantially the same amount of A3/A-/A-Trust Bonds asit would have been selling NYCGO's with the same rating. However, it isbelieved that the present system would enhance the ratings on all of theother bonds. Possibly these “natural” double-A Trust Bonds could tradeflat to or through insured bonds. The benefit of the bond issue to theCity (or other credit issuing entity) would be the sum of: i) avoidedcost of bond insurance on the senior TBs; plus ii) the interest savingsattributable to the credit spread between the ratings on the senior TBsand the underlying ratings on any related Issuer Bonds; minus iii) anyincrease in the interest cost or cost of bond insurance for thesubordinate TBs as compared with what such costs would have been for theunderlying bonds.

Moreover, by separately applying the two-party pay criteria to theportion of each series of senior TBs that is secured by each of theother series, it should be possible to assign an even higher rating toat least half of the senior TBs.

It is noted that the examples discussed above do not take into account avariety of issues, including: i) relative size of issuance among thedifferent credits; ii) different timing of issuance among the differentcredits; iii) intra-period timing issues with respect to debt servicepayments on the different categories of Issuer Bonds; iv) differences inthe shape of debt service among the different credits; v) disclosureissues raised by the structure (e.g., disclosure on all three creditscould be material to every series of both senior and subordinate bonds);vi) tax issues; and vii) legal authority of the Issuer to implement thestructure, but these can be provided for in the present system to theextent that they are applicable.

Another example of a slightly different application of the presentinvention would be for the issuing entity, e.g., New York City to: i)have a single class of TB tranches for each of the GO, WFA and TFAcredits; and ii) have the amounts allocable to the GO and WFA TBs securepayment of TBs issued for the TFA. Since the TFA is rated higher, theexposure to the TFA credit should not hurt the ratings of the GO and WFATBs. However, the TFA TBs should be rated triple-A.

Referring now to another example of a pooled Trust Bond embodiment ofthe present invention, a credit structure combines the revenues from twoor more systems as part of a single security package. More particularly,a trust could hold senior lien obligations from the two or more systems.In one example, the trust may be single purpose trust. The trust couldhave the authority to issue securities against those securities held inthe trust. Each system could be legally responsible for their respectiveobligations to the trust. The trust, in turn, could issue securities tothe public in a senior/subordinate structure. The revenue stream flowingout of the trust from the obligations of the two or more systems (e.g.,a water system and a sewer system), which could mirror the principal andinterest on the publicly held debt, could provide bondholder security.The senior/subordinate structure could allow the trust to tranche thesecurities with differing coverage ratios. Such tranched securitiescould allow for the senior lien obligations to be rated higher than theunderlying obligations on their own.

A more specific example of the aforementioned embodiment of the presentinvention is as follows: A water system and a sewer system could eachissue bonds in the total amount of $200 million to the trust (i.e., $100million each). The trust could then issue bonds to the public consistingof $100 million senior lien bond(s) and $100 million junior lienbond(s). Bondholders in general would benefit because the revenues usedto pay debt service would be coming from both the water and sewersystems. In addition, the senior lien bondholders would benefit becausetheir bonds would have coverage of two times (at least $200 million inrevenues to pay $100 million in senior lien obligations). If there wereto be a default by either the water or sewer system to the trust, thesenior lien bondholders would be secured because the non-defaultingsystem's revenues would cover the senior lien obligations. A structurelike this should allow the senior lien bond(s) to achieve a rating of atleast Aa2/AA (by STANDARD & POORS, for example), while the junior lienbonds would receive ratings at the lower of the water or sewer systemratings.

While a number of embodiments of the present invention have beendescribed, it is understood that these embodiments are illustrativeonly, and not restrictive, and that many modifications may becomeapparent to those of ordinary skill in the art. For example, while thepresent invention has been described with reference to each credit beingassociated with a single senior holder financial instrument and a singlesubordinate holder financial instrument any desired number of tieredseniority senior holder financial instruments and/or tiered senioritysubordinate holder financial instruments could be used. Further still,while the present invention has been described with reference to eachsenior holder financial instrument and each subordinate holder financialinstrument being associated with a single respective senior holder and asingle respective subordinate holder any desired number of seniorholders and/or subordinate holders could be associated with eachrespective senior holder financial instrument and subordinate holderfinancial instrument. Further still, each TSB holder (i.e., each seniorholder or each subordinate holder) could directly own the respectiveunderlying credit or have a pass-through interest in the form ofownership of an interest in a mutual find, trust, partnership, orcorporation (either debt or equity). Further still, the obligation ofsubordinate holders to cover for senior holders could be in the form aguarantee, an insurance policy, or an agreement to purchase (either allpayments or defaulted payments). Further still, each credit andassociated senior holder financial instrument and/or subordinate holderfinancial instrument could be incorporated into a single instrument.Further still, the present invention may be implemented with or withoutthe cooperation of a credit issuer. Further still, the pooled creditscould be from related issuers and/or from separate issuers. Furtherstill, the pool may have a relatively large number of credits (a largerpool should allow for smaller subordinate TB tranches.) Further still,even for a large pool of general infrastructure type credits (excludingbonds such as appropriation bonds, with significant event risk), itshould be valid to assume that not more than two or three credits wouldever be in a non-payment mode at the same time.

Further Embodiments

As used herein, the terms “component”, “computer based component” or“computer implemented component” refer to hardware or software executedby and combined with hardware, including software stored in tangibleprocessor readable media. The hardware can be a device using a computerprocessor, a specialized processor such as an application-specificintegrated circuit (ASIC), or the like. As used herein, the term “debt”or “obligation” refer to bonds, mortgages, loans, or any otherobligation which requires payments by debtor of the principal of thedebt and at least some interest, and wherein the payments occurs at aplurality of times over a time period. Such debt obligations, and theterms for the debt, including the amount of principal, interest, paymentamounts, payment times, time period, or the like, may be specified in afinancial instrument, such as an electronic financial instrument. Whilevarious embodiments of the invention are directed to insuring bonds,applications to other types of debt are also within the scope of theinvention.

While the descriptions refers may refer to insuring bonds or debtsand/or insured bonds or debts, generally the systems, processes, media,devices, and components described herein can be adapted to manage trustbonds or support bonds (in place of insuring bonds) and supported bonds(in place of insured bonds), without departing from the scope of theinvention. Generally, where appropriate, the term “trust bonds” or“support bonds” can be used interchangeably with the terms “insuringbonds” or “insuring debts” and the term “supported bonds” can be usedinterchangeably with the terms “insured bonds” or “insured debts.”

The various processes, systems, apparatuses, and media described hereinare operated by a processor and/or computer based systems and canproduce a tangible results and transformations of the attributes of thecomputer based components described herein, including an improved creditrating, additional funds, improved resources for issuers to borrow fundsand provide services.

Further embodiments of the invention are directed to acomputer-implemented method, system, apparatus, and media for minimizinga risk associated with an anticipated value of an investment. An insurerestablishes a capital structure within a computer memory of a computersystem, the capital structure designed to minimize risk and structuredwith regulatory capital and a cash stream that is pledged to fund adefault on payments associated with the investment. Establishing thecapital structure can include allocating regulatory capital based on acoverage factor multiplied by an average annual depression scenariodefault percentage for the investment and determining a portion of thecapital structure for a pledged insuring investment that produces atleast a portion of the cash stream. A determination of whether theestablished capital structure is sufficient to obtain a minimal targetcredit rating for the insurer is generated. The desired target rating iselectronically provided based on the determination.

Other aspects of the invention are directed to a method, system,apparatus and media for managing debt, including managing insurance ofdebt. Insuring for a default of a debt is managed by establishing aninsuring debt related to an insured debt of a debtor based on an insureddebt amount of the insured debt. The debts can be bonds issued by amunicipality. A first loss class and a second loss class can beallocated in an insuring trust. A first class holder can be entitled toa payment from the insuring debt based on a debt owed to the first classholder from an established insuring fund of the insuring trust. Theinsuring fund is used to insure for a default of the insured debt. Ifthe insured debt is not in default, the payment is allocated to thefirst class holder. Otherwise, the payment is intercepted, and aninsuring payment from the insuring fund is paid to a holder of theinsured debt to cure the default.

At least one objective of the various embodiments of the invention is tooperate the various components described herein in a way that assurestheir long-term creditworthiness and viability including: coveringdefaults significantly in excess of rating criteria and for the fullterm of the Insured Bonds; avoiding certain event risks that would bepermissible under rating agency criteria; and fully funding capital uponissuance of the Insured Bonds versus reliance upon uncertain futurefunding, when needed. The various aspects of the invention provideadvantages that include significant credit strengths relative to aconventional cash-based equity structure that will create a pricingadvantage with bond purchasers and increased confidence among bondissuers e.g., higher default tolerance and for the full term of thebonds; reduced sensitivity to changes in insured portfolio creditprofile; superior returns on cash equity and greatly reduced risk; andsignificant benefits to issuers both to maturity and to the call datefrom using insurance.

FIGS. 12A to 12E, 13, 14A to 14D, 15 to 20, 21A, 21B, 22A, 22B, 23 to26, 27A to 27H, 28A to 28I, 29A, 29B, 30A to 30C, 31A to 31I, 32A to32F, and 33A to 33F show various embodiments of methods, data models andinterfaces directed to insuring defaults on debt obligations, includingbond obligations using a computer implemented Bond Enhanced CapitalModel (“BECM”) that is operated by computer systems and electronicexchanges related to the operations of a BECM management company (the“Company”). As used herein, the “Company” refers to a company or otherorganization that is managing a trust or other transaction pool usingthe BECM computer based methodology of the present invention. In variousembodiments, the BECM is embodied in a method, system, apparatus, andmedia for funding the capital charges of a bond insurer (i.e., fundingpotential defaults under a depression scenario) that utilizes aplurality of sources of capital, including

-   -   Debt service payable on pledged bonds (the “Insuring Bonds”)        representing a pro-rata portion of each maturity of every        Insured Bond Issue; and/or    -   Cash capital derived from a public or private investment.

As used herein, “Insured Bonds” refers to any bonds that are thebeneficiaries of a Trust Guaranty by the Insuring Trust. Each InsuredBond Issue can meet certain requirements set forth by the Company at thetime that that any portion thereof is designated as Insured Bonds.Insuring Bonds includes bonds deposited into to the Insuring Trust atthe direction of the Company and related to a specified InsuringCertificate. In one embodiment, the Insuring Certificate can include thevarious classes of securities issued by the Trust (e.g., Trust Bonds).

The “Insuring Trust” or “Trust” refers to any entity holding the certaintrust certificates and obligated to make payments according to legalobligations using the BECM methods as described herein.

“Insuring Certificate” refers to a trust certificate issued by theInsuring Trust and recorded in computer readable media which grantsbased on a computer determination to the holder the right to receive thefollowing payments (“Insuring Certificate Payments”), subject to theterms of the trust recorded in computer media and used to program thecomputer system of the trust, with respect to the right and obligationof the Trustee to intercept such payments to secure each Trust Guarantymade by the Insuring Trust. The programmed terms can include:

-   -   Payments of principal on a specific Insuring Bond (the “related”        Insuring Bond)    -   A specified portion of the payments of interest payable on such        related Insuring Bond    -   A specified portion of the payments of interest payable (e.g.,        from a supplemental coupon) on such related Insuring Bond (the        coupons is an obligation of the issuer that is characterized in        computer processing as a debt of instead of a fee paid by the        issuer).    -   A specified portion of any other payments of interest payable        with respect to the Insured Bonds of the same Insured Bond Issue        (the “related” Insured Bonds) or Insuring Bonds of the same        Insured Bond Issue (the “related” Insuring Bonds)    -   Other specified amounts from funds available to the Trust        including:        -   Debt service payments on related Insuring Bonds that are            received by the Trust and that        -   are not payable with respect to a specific Insuring            Certificate        -   Fees payable to the Trust with respect to the related            Insured Bonds        -   Investment income or other funds received by the Insuring            Trust

“Trust Guaranty” refers to a guaranty of the payment of debt service ondesignated bonds, which guaranty is programmed to be secured by theright and obligation of the Trustee:

-   -   To intercept Insuring Certificate Payments in an amount        sufficient to cure any payment default    -   with respect to such designated bonds and    -   To apply such intercepted amounts:        -   To the guaranteed payments or        -   In the event that such guaranteed payments have been made on            behalf of the Insuring Trust from another source (including,            without limitation, by the Company or by a liquidity            provider), to reimburse such amounts and interest thereon.

The Trust Guaranty may also include (A) a guaranty of the payments duewith respect to a line of credit or letter of credit, insurance orreinsurance policy, or similar instrument that secures payment of suchdesignated bonds and (B) a guaranty of the ongoing payments (but nottermination payments) due on any interest rate swap or similar interestrate exchange agreement with respect to such designated bonds. Adesignation of a bond by the Company of Insured Bonds can be recorded incomputer media as occurring at the time that the Company enters into acontractual agreement based on such designation, (in one embodiment,regardless of whether such agreement is subject to conditions).

At or around the time that an Insured Bond is designated by the Company,the related Insured Bond Issue can be determined (or required) to meetthe following requirements:

-   -   The rating of such Insured Bonds can be in one of the four        highest rating categories by each Rating Agency (e.g., Baa, A,        Aa, or Aaa) then rating such bonds    -   Such Insured Bonds can be categorized as within        -   The 1st, 2nd, or 3rd Single Risk categories by Standard and            Poor's. In other embodiments, the 1st and 2^(nd) categories            may be used. In yet other embodiments, only the 1^(st)            category may be used.        -   The 1st, 2nd, or 3rd Municipal Finance Class by Fitch            Ratings, or        -   Can be determined by each Rating Agency and the Rating            Agency can analyze such bonds to represent an equivalent            credit risk (e.g., Moody's Loss Given Default).

A “rating” refers to a credit rating assigned to any Insured Bonds orInsuring Bonds by a Rating Agency. In one embodiment, for purposes ofthe Insuring Trust, the rating assigned to any such bonds may berecorded as no higher than the credit rating requested by the Companyfrom any such Rating Agency with respect to such bonds.

A “Rating Agency” refers to (e.g., with respect to any series orsubclass of Insured Bonds or Insuring Bonds) any nationally recognizedrating agency which has provided a rating for such series or subclass atthe request of the Company.

In carrying out its business, the Company's computer system can provideguarantees of bonds or other obligations that benefit from a Guaranty bythe Insuring Trust. In one embodiment, the provision of guarantees canbe performed provided that in the event that the Company makes a paymentwith respect to its guaranty, it will be entitled based on computercode, triggers, etc. to automatically be reimbursed therefore pursuantto the terms of such Guaranty by the Insuring Trust.

In some embodiments, the computer system of the Company and the Trustmay be programmed to exclude the guarantee of

-   -   Accelerated payments of bond principal unless such accelerated        payments (together with the Insured Bond Issue) would meet the        Company's and the Insuring Trust's underwriting standards,    -   Swap payments (including accelerated swap termination payments)        unless such payments (together with the Insured Bond Issue)        would meet the Company's and the Insuring Trust's underwriting        standards.

A computer system of the Company and the Trust can also provided onlineaccess to real time snapshots of the Insured Bond and Insuring Bondportfolio, thereby providing transparency, and avoiding of event riskand moral hazard risk, including avoiding providing Guaranties ofappropriation debt.

Table 2 below is a summary of comparisons of features of the BECMagainst an Alternate Monoline like model. In some embodiments, some ofthe BECM features may be present and some of the features may be mixedan/or replaced with the Alternate Monoline like model without departingfrom the scope of the invention.

TABLE 2 Structural Elements Alternate Monoline Like Model BECM Timeperiod Four to six years Maturity of the Insured Bond withstanddepression scenario defaults Cash Capital First loss Second loss behindInsuring Bonds Future capital Yes To grow insured portfolio requirementsInsured credit Credit criteria determined company Investment grade andsingle risk portfolio profile by company. categories of the highestquality (in other embodiments, different BECM entities may beestablished to guarantee differing risk categories); Minimize eventrisk; no: Appropriation debt, Highly correlated credits (e.g., tobaccobonds), and Termination payments and/or acceleration. ROE cash capitalHistoric ROE of 15% achieved by 15% ROE with previously statedincorporating non - municipal ratings guidelines. credits and lowerrated municipals. Insurance 100% charged upfront to the issuer, 25% willbe charged upfront with premium refunding bonds permits no the balancecharged over time a as a payments recovery of insurance premium couponon the Insuring Bonds. In either before or after the call date. otherembodiments, this 25% may be variable, changed, or modified as aparameter of the system. The coupon can be characterized as a debtinstead of a fee. BECM has a much smaller upfront fee requirementbecause a portion of the overall fee is paid upfront and the rest of thefee paid over time. If the bonds are refunded, the issuer captures thesavings inherent to not paying the premium after the call date. Theissuer's cost of insurance to the call date is equal to its cost tomaturity. Benefit of Zero benefit to issuer; all benefits Bond issuerpays premium to bond unamortized accrues to bond insurer. call date.insurance Insuring Bonds create possibility of premium due to a largegain for Insuring early bond Bondholders upon redemption on anredemptions insured issue. The Insuring Bonds trade as pre-refunded upuntil the call date. The Company and Regulatory Capital retains the fullbenefit of the upfront portion of the premium even if bonds are redeemedplus the annual premium while the bonds remain outstanding. InsuringBonds N/A Highly dynamic and resilient to market dynamics marketconditions: Wide credit spreads (current market) provide the necessarypremium/inducement to the Insuring Bonds. When spreads are narrow, thespreads necessary to induce the Insuring Bondholders will becorrespondingly less. Leverage Ratio Assumptions for rating servicesBECM dedicates capital in at least Calculation required cash set asidesto cover two forms: as percentage of debt service in case of a default:Insuring Bonds equal to a insured par Four year depression - scenariopercentage of the total issue. In one 1.75% defaults each yearembodiment, the percentage is 4%. Coverage factor 1.5 x The percentagecan be as high as Annual debt service equals 1.75% * 3 = 5.25%. 8% ofpar Allocated cash = Dedicated Capital = 1.75% defaults each year * 4years * 1.75 defaults each year * 8% annual debt service as 1.5coverage * 8% annual debt percent of par service as percent of parDedicated Capital = 4 * 1.75 * 1.5 * 8% = .84% Insuring Bonds +Allocated Capital Leverage ratio = 1/.84% = 119 x 4% + (1.75% * 8%) =4.14% Leverage ratio = 1/4.14% = 24x Years of coverage Debt service canonly cover default Debt service can cover default for for 4 years lifeof bond (e.g., 20 years) because there will be constantly new InsuringBonds added to the pool which has cash streams which can be interceptedfor the debt service. In one embodiment, the non-defaulting borrower'scash stream can be used to also cover the default.

Further differences in the features of the BECM against an AlternateMonoline like model are described below in Table 3. In some embodiments,some of the BECM features may be present and some of the features may bemixed an/or replaced with the Alternate Monoline like model withoutdeparting from the scope of the invention.

TABLE 3 Structural Elements Alternate Monoline Like Model BECMRegulatory (Cash) $500 million to $1.0 billion $200 million CapitalFunded as Common Equity Funded as Preferred Equity requirement CashCapital First loss Second loss behind exposure Future additional Yes,pursuant to existing/future Incremental Cash Capital may Cash Capitalrating agency and regulatory be required above guarantee requirementsCash Capital requirements portfolio of $120 billion Common EquityMinimum $500 million Common $20 million Common and/or Equity requiredfor Cash Capital Preferred Equity used to fund Company's net revenuesallocated Company's infrastructure to $500 million Common Equityrequirements holders Company's net revenues allocated Common Equitydiluted by future to: Cash Capital requirements $20 million CommonEquity [$XX] million existing Common Equity No future Common Equityrequirements and/or dilution Credit criteria of Credit criteria uniqueto individual Pre-defined credit criteria: guarantee guarantee companiesInvestment grade issuers portfolio Modified at will by senior Three mostconservative single risk management categories (in other embodiments thetwo most conservative or the single most conservative risk categoriesmay be used instead) Not permitted: Appropriation debt Highly correlatedcredits (e.g., tobacco bonds) Payment by 100% charged upfront to the 25%charged upfront with the municipal issuer issuer balance chargedannually as a of Guarantee Upon bonds being refunded, no supplementalcoupon premiums recovery of insurance premium by Upon bonds beingrefunded, issuer issuer after the call date captures the savingsinherent to not paying the premium after the call date Benefits due toZero benefit to issuer Bond issuer pays premium to bond early bond Allbenefits accrue to bond call date redemptions guarantor Material gainfor Trust Certificates upon refunding Amount of time Four years Finalmaturity of the guaranteed Guarantor able to Depression Scenario covered1.5 bond portfolio withstand times Depression Scenario depressionscenario default of 1.75% per year Standard & Poor's AAA requirementLeverage Ratio Assumptions for rating services Dedicated Capital =Calculation as required Cash Capital to cover debt 4 years * 1.75defaults each year * percentage of service in case of a default: 1.5coverage * 8% annual debt guaranteed par Four year depression scenarioservice as percent of par 1.75% defaults each year 4 * 1.75 * 1.5 * 8% =.84% Coverage factor 1.5 x Leverage ratio = 1/.84% = 119 x Annual debtservice equals BECM's dedicated Cash 8% of par Capital comprises: TrustBonds equal to 5% of the total issue Allocated cash = 1.75% defaultseach year * 8% annual debt service as percent of par Dedicated Capital =Insuring Bonds + Allocated Capital 5% + (1.75% * 8%) = 5.14% Leverageratio = 1/5.14% = 19x Example: Dedicated Capital cost for DedicatedCapital Cost $100 million Issue Trust Bond Cost: A - rated City GO $5.0mm * 1.25% 20 year level debt $62,500 $7,800,000 annual debt serviceCash Capital Cost: Legacy Insurer ROE - 15% 15% * 1.75% * $7.8 mmDedicated Capital Cost: $20,500 7% * $7.8 mm * 1.5x Annual Cost ofDedicated Capital: $819,000 $62,500 + $20,500 Annual Cost of DedicatedCapital: 15% * $819,000 $123,000

As described herein, a computer system can be programmed to performactions for managing the BECM, including paying funds, issuingobligations, credits, or the like. Such financial transactions includerecording data in a tangible readable medium in accounts of the partiesinvolved in the transactions and/or transmitting data over a computernetwork, such recording and transmitting comprising an electronicexchange.

FIGS. 12A to 12E show embodiments of systems for managing debt insuranceover a computer network. As shown, network/communication medium 1206provides communication to a plurality of computer based components,including debt holder(s) 1202, guarantor 1204, issuers 1206-108, trust1220, trust certificate holders 1216-1217, trustee 1218, and ratingagency 1214. The network/communication medium 1206 can be a computernetwork, such as a wireless network, Local Area Network (LAN), Wide AreaNetwork (WAN), or the like, and/or the memory and/or bus of a computingdevice. As shown, each of the components of the systems of FIGS. 12A to12E are computer implemented components. The components can communicatewith each other using a networking interface, a networking protocol, inmemory operating system calls, remote procedure calls, or the like. Thecomponents may provide a interface for receiving commands from usersand/or providing information to users. The components can be combined inone device, separated into several different devices, or the like,without departing from the scope of the invention. In one embodiments,the components may be included in or configured as the device of FIG.13. In one embodiment, the components may use the data models and userinterfaces of FIGS. 14A to 14E, 26 to 33F to perform their operations.In one embodiment, the components of the systems of FIGS. 12A to 12E canbe perform the processes of FIGS. 15 to 25.

In one embodiment, the components of FIG. 12A to 12E may be programmedwith parameters and instructions to reflect the instructions forstructuring the various components of the BECM system in accordance withthe requirements of ATTACHMENT A. ATTACHMENT A shows one example of adefinition for implementing the BECM system.

Under the BECM, bonds 1211 that an issuer 1208 wants to insure can besubdivided into two parity series which can be sold simultaneously:

-   -   insured debt 1209 sold with the benefit of an AAA guaranty by an        monoline insurer or similar guarantor to debt holders 1202    -   Insuring debt 1210, representing a pro-rata portion of every        maturity, sold on an uninsured basis

In general, issuers 1206-1208 can include any computer implementedcomponent configured for establishing an insured debt 1209 related to aninsuring debt 1210 of a debtor based on an insured debt amountrepresenting at least a proportion of the insured debt, wherein theproportion is maintained constant for any redemption from the insured orinsuring debts. As shown, issuer 1208 may include insured debt 1209 andinsuring debt 1210. Insured debt 1209 and insuring debt 1210 cancomprise any computer based component, including software executing andcombined with hardware, a database, or the like, configured to maintainrecords relating to payment, obligations to debt holders such as thoseassociated with at least one of debt holder(s) 1202, and other terms(interest, maturity date, etc.) for the respective debts.

Debt holder(s) 1202 can include any computer implemented componentconfigured to assume, retire, or otherwise manage debts for a holder ofdebts. Debt holder(s) 1202 can include computer interface for managingsuch debts, trading the debts, transferring funds, amounts paid fromcoupons, or the like.

The portion of each maturity represented by the insuring debt 1210 canbe sized so that the debt service thereon exceeds the level of averageannual defaults that can occur under the rating agencies 1214 four-yeardepression scenario plus coverage sufficient to meet the AAA ratingcriteria. For example, for an A rated city Governmental (GO) bond 1211,the capital charge is 7%, representing an annual default of 1.75% perannum over the four-year period. At a 2 times coverage multiple, theinsuring debt 1210 can represent 3.5% of the total bonds of eachmaturity. Correspondingly, at a 3 times coverage multiple, the insuringdebt 1210 can equal 5.25% of each maturity. In those two examples, theinsured debt 1209 can be sized at 96.5% and 94.75% of the total bond1211 issue, respectively.

In general, rating agency 1214 can include any computer implementedcomponent configured for receiving, over the network 1206, a creditinformation record of the insured debt based on insurance paymentstructuring for the insured debt; and providing an increase in a creditrating for the insured debt based on the received credit informationrecord.

The proceeds of the Insured Bond 1209 and insuring debt 1210 can equal100% of the proceeds required by the issuer(s) 1206-108, just as in thecase of an uninsured issue or a conventionally structured monolineinsured issue. In the 2 times coverage example, approximately 96.5% ofthe proceeds can be raised from the sale of the insured debt 1209 whilethe remaining 3.5% can be raised from the sale of the insuring debt1210. The insured debt 1209 can be priced with an insured coupon and theinsuring debt 1210 can be priced with an uninsured coupon.

The cost of the credit enhancement can represent a targeted percentage(e.g., 75%) of the total yield benefit between uninsured bonds and AAAinsured bonds (e.g., insured debt 1209), leaving the issuer(s) 1206-1208the remainder of the benefit of (e.g., 25%). One difference in the BECMapproach from the historic monoline practice is that most of the cost ofinsurance can be paid by the issuer(s) 1206-1208 over time. For example,a smaller portion (e.g., 25% of the 75%) of the cost can be paid upfront (step 12016 and 12032) and the remainder (e.g., 75% of the 75%)can be paid over time (step 12046). The credit enhancement payment overtime can be structured as an additional coupon on the insuring debt1210, for example, as an additional 250 basis points on each insuringdebt 1210 maturity. This reduction in the upfront cost of insurance canhave a significant benefit to issuers 1206-1208 since their cost ofinsurance to the call date can be significantly reduced. This processmay eliminate a significant shortcoming of traditional monolineinsurance—that the issuer's savings to the call date were significantlylower and, perhaps, nonexistent.

In addition to the use of two series (one insured and one uninsured) andthe payment of an additional coupon on the uninsured bonds, there is oneother requirement on the issuer that is unique to the BECM. Theissuer(s) 1206-1208 can be configured such that a redemption of thebonds can be executed pro rata among the Insured and Insuring Bonds ofeach maturity so as not to reduce the percentage of Insuring Bonds inany maturity (step 12606).

The issuer 1206's insured debt 1209 can be sold to the public in atypical manner. However, the insuring debt 1210 can be priced by theissuer 1206 as uninsured bonds, but may not be sold directly to thepublic. Rather, the insuring debt 1210 can be deposited into a trust1220 (e.g., the Insuring Trust) (step 12022) in exchange for payment ofthe proceeds thereof (steps 12024, 12020, 12014, and 12030).

The Insuring trust 1220 can simultaneously raise an identical amount ofproceeds (steps 12026, 12028) by selling trust certificates 1216-1217(step 12026) with respect to the insuring debt 1210 that may passthrough to the purchaser of each certificate 1216-1217 (a) the followingpayments made with respect to a specific corresponding insuring debt1210: the bond principal and the bond interest (at the uninsured rate)(step 12044) and (b) a portion of the bond interest payable with respectto the Insuring Bonds, which may exceed the interest payable on suchspecific insuring debt (steps 12064, 12066).

In order to permit the insuring debt 1210 sold through the trust 1220 tobe priced efficiently, they can be divided into various subclasses1221-1222. In one embodiment, the various subclasses can be the varioussub-pool described above where the nature of the risk within thesub-pool is similar. There are two basic types of subclasses: lossposition subclasses 1221-1222 and loss category subclasses. The purposeof the various subclasses is to create efficient pricing of the insuringdebt 1210 by making it simple for insuring bondholders 1220 (andassociated certificate holders 1216-1217) to understand the risk thattheir cash flows can be intercepted (steps 12064, 12066). In particular,the risk to Insuring Bondholders of having their cash flows interceptedcan be configured to be as similar as possible to the risk of nonpaymentof their underlying bonds. Conversely, the risk that cash flows can beintercepted to fund a default within a riskier credit type may beextremely remote. Loss category subclasses are intended to groupInsuring Bonds into subclasses where the underlying bonds have similarrisks. For example, GO bonds and sales tax bonds can be in differentloss category subclasses. Loss position 1221-1222 subclasses areintended to indicate the order in which Insuring Bond cash flows can beintercepted within the same loss category subclass.

For example, the insuring debt 1210 can be divided by the trust 1220into several “loss position” subclasses 1221-1222 which are subject tohaving their cash flows intercepted (in the case of a default) in aprescribed order (steps 12064, 12066). The number of loss classes is notcritical and will generally range from 2 to 10 and preferably is 2 to 5.In one embodiment, the insuring subclasses 1221-1222 do not enhance eachother, but only the insured debt 1209 (steps 12064, 12066). Accordingly,the insuring subclasses 1221-1222 for each insured issue have two ratingattributes:

-   -   The “underlying rating” of the issuer 1208—in our example above,        an A rating; and    -   The “structure rating” of the insuring subclass 1221-1222—a        separate target rating of the subclass that reflects the risk        that the debt service of the subclass can be intercepted to fund        an insured default.        -   Insured Bonds—AAA        -   5^(th) loss—AA        -   4^(th) loss—A        -   3^(rd) loss—BBB        -   2^(nd) loss—BB        -   1^(st) loss—NR

In the event of a default by an issuer 1206-1208 whose bonds are insuredunder the BECM, the loss can be allocated, first, to the insuring debt1210 of that same issuer 1206 (the “related” Insuring Bonds) by lossposition subclass 1221-1222 (step 12066) and, second, to the InsuringBonds of other issuers 1208 (“nonrelated” Insuring Bonds), also by lossposition subclass 1221-1222 (step 12064). In the event that payments dueto a nonrelated Insuring Bondholder are diverted to cure a default (step12064), future payments due to the related Insuring Bondholders can beintercepted to make the nonrelated Insuring Bondholders whole (step12064). The subordination of the Insuring Bonds of each issuer(s)1206-1208 in the case of a default by that issuer 1206 not only to theinsured debt 1209 of that issuer 1206, but also to all other insureddebts, together with a conservative underwriting approach, as describedbelow, make it highly unlikely that Insuring Bonds will suffer anultimate nonpayment (as compared to a temporary nonpayment) due to adefault of a nonrelated issuer 1208.

In general, trust 1220 can include any computer implemented componentconfigured for allocating, in an insuring trust, a first loss classhaving a first loss class holder associated with one of debt holder(s)1202 and a second loss class having a second loss class holderassociated with another one of debt holder(s) 1202. In one embodiment,trust 1220 is configured to provide the first loss class holder (of lossclass 1221) with an first electronic certificate in the insuring trustrelated to the insured debt, and to provide the second loss class holder(of loss class 1222) with a second electronic certificate in theinsuring trust unrelated to the insured debt, and wherein the insuredand insuring debts are bonds. As shown, trust 1220 includes loss class1221-1222. Loss class 1221-1222 can comprise any computer basedcomponent, including software executing and combined with hardware, adatabase, or the like, configured to maintain records relating tosubordination of payments between the loss classes, payment terms foreach loss class, or the like. Loss class 1221-1222 can include softwarecombined with hardware for routing, over network 1206, payments from orto trust certificate holders 1216-1217 associated with the appropriateloss classes 1221-1222. For example, loss class 1221 may be associatedwith trust certificate holder 1216, and loss class 1222 may beassociated with trust certificate holder 1217.

In one embodiment, trust 1220 is configured for routing, over thecomputer network 1206, a payment payable from the insuring debt 1210 toa first class holder in the first class, wherein the first class holderis entitled to the payment based on a debt to the first class holder ofan insuring fund of the insuring trust 1220, and wherein the insuringfund is for insuring an obligation to make payments for the insured debt1209.

In one embodiment, routing, by trust 1220, to the first loss classholder the related payment further comprises allocating the relatedpayment, such that: (a) a portion of a defaulted insured debt servicefor a default of an obligation on the insured debt is deducted from therelated payment; and (b) a portion of the defaulted insured debt servicefor the default of the obligation is deducted from the related payment,if another debtor defaults on an unrelated obligation and the first lossclass is junior to the second loss class; and (c) a portion of therelated payment is added to an unrelated payment, if a portion of aprior unrelated payment from an unrelated insuring debt was used to fundthe defaulted insured debt service for the insured debt.

In one embodiment, trust 1220 is configured for routing to the secondloss class holder the unrelated payment for an unrelated insuring debt,by allocating the unrelated payment, such that: (a) a portion of thedefaulted insured debt service for a default of the unrelated obligationis deducted from the unrelated payment; and (b) a portion of thedefaulted insured debt service for the default of the unrelatedobligation is deducted from the related payment, if the debtor defaultson the obligation and the second loss class is junior to the first lossclass; and (c) a portion of the unrelated payment is added to therelated payment, if a portion of a prior related payment from theinsuring debt was used to fund the defaulted insured debt service forthe unrelated insured debt.

Trust certificate holders 1216-1217 can include any computer implementedcomponent configured to assume, retire, or otherwise manage certificatesof trust 1220 for a holder of certificates. Trust certificate holders1216-1217 can include computer interface for managing such certificates,trading the certificates, transferring funds, amounts paid from coupons,or the like.

Trustee 1218 can include any computer implemented component configuredfor receiving, over the network 1206, non-default principal and interestpayments for the insured debt and the insuring debt from the issuercomponent; and routing pro-rata amounts of the non-default paymentsbetween holders of the insured debt and the insuring trust that holdsthe insuring debt.

In the case of insured debt 1209 under the BECM, the Insured Bondholderis protected from the risk of nonpayment both by the issuer 1206-1208'scredit and by the bond insurer 1204's credit. Although there are tworelevant ratings, for bond insurer 1204 and bond issuer 1206-1208, sinceboth ratings relate to the same risk (nonpayment of the issuer's bonds),the insured credit and rating supersede the uninsured credit and rating.However, in the case of the insuring debt 1210, the underlying ratingand structure rating reflect two distinct credit risks for the trustcertificate holders 1216-1217: the risk that the related borrower willnot pay and the risk that the insuring debt 1210's debt service will beintercepted due to a default by a nonrelated issuer. The InsuringBondholder 1220 (and related certificate holders 1216-1217)'s directexposure to the underlying credit discourages adverse selection in thecomposition of the insured portfolio. Since the Insuring Bondholders1220 (and related certificate holders 1216-1217) of each issuer1206-1208 are primarily responsible for a default by that issuer, theyare incentivized to make prudent decisions with respect to purchasinginsured debt, which can in turn affect the viability of including weakercredits in the insured portfolio.

Although permitted to be insured under current monoline rating criteria,in one embodiment, the insured portfolio can exclude bonds withsignificant event risk. For example, appropriation bonds may not beinsured by the trust 1220, with the possible exception of highlystructure credits that effectively eliminate the possibility of nonappropriation. The insured portfolio can be restricted to conservativelyselected bonds (e.g., GO, special tax and revenue) with underlyingratings of BBB or better, of which the overwhelming majority can berated in the A category. So, under conventional pooled rating criteria,all of the insuring subclasses 12212 can be rated BBB or higher.However, in the case of the 1st and 2nd loss position subclasses1221-1222 the target structure rating reflects (a) the possibility of adeterioration in the underlying ratings of the insured portfolio and (b)the desire to maintain stable ratings for all of the insuring subclasses1221-1222, even in the event of such a deterioration of the portfoliocredit quality. Also, the rating criteria for monoline insurers withtarget ratings below AAA include a capital charge for all (orsubstantially all) insured debt 1209 with ratings below AAA, even if therating of the Insured Bond 1209 is higher than the monoline insurer'starget rating.

For example, an A rated monoline is required to cover the same assumeddefaults as a AAA monoline based on credit type and rating category.However, the coverage for an A rated monoline is 0.8 times the assumeddepression scenario defaults. Moreover, if an Insured Bond 1209 is ratedat or above the target rating of a monoline insurer's, that coveragerequirement is further reduced, e.g., to 0.25% thereof for a AA ratedinsured debt 1209 and to 0.2% thereof for an A rated Insured Bonds 1209.In structuring the insuring debt 1210, coverage targets can beextrapolated based on the existing criteria for AA and A rated monolineinsurers in order to create coverage targets for a BBB (0.64 timesassumed defaults) and BB rated monoline insurer (0.56 times assumeddefaults).

Each insuring subclass 1221-1222 can be managed, stored, and used of asa monoline insurer whose function is to raise the structure rating ofthe insured debt 1209 (based on the monoline criteria discussed above)to the target rating of the next higher subclass. So, the 1st losssubclass 1221 can contain enough insuring debt 1210 to meet the capitalcharges and coverage levels that can be assessed on a BB monolineinsurer that insured the underlying bonds. Similarly, the 2nd losssubclass 1222 can contain enough insuring debt 1210, together with the1st loss subclass, to meet the capital charges and coverage levels thatcan be assessed on a BBB monoline insurer that insured the underlyingbonds, and so on and so forth. However, the insuring subclasses1221-1222 do not face the same adverse selection issues that can face asimilarly rated conventional monoline insurer, which may rely oninsuring credits which do may not appeal to more highly rated insurers.

The Insuring trust 1220 can hold the insuring debt 1210 of all of theparticipating issuers 1206-1208. In the event of a payment default of aparticular issuer 1208, the Trust can intercept the debt service on theinsuring class of bonds (in the order prescribed by the terms of theInsuring trust 1220), first those issued by the defaulting issuer 1208,and secondly other unrelated insuring debt 1210 payments from all otherissuers 1206, to fund the payment shortfall of the defaulted InsuredBond debt service. In one embodiment, no local government are affectedby the default of another issuer(s) 1206-108. The Insuring Bondholders1220 (and related certificate holders 1216-1217) can be compensated fortaking the first loss position relative to the insured debt 1209 byrealizing a higher yield than the Insured Bondholder or a typicaluninsured bondholder. As the loss position subclass 1221-1222 of theinsuring debt 1210 gets lower, the higher the yields that can be paid tothe Insuring Bondholders 1220 (and related certificate holders1216-1217). The higher yield can come from the additional coupon paid bythe issuer 1207. The portion of the coupon not paid to the InsuringBondholders 1220 (and related certificate holders 1216-1217) can beapplied by the trust 1220 either to pay operating expenses of the trust1220 and guarantor 1204, to fund an appropriate return on the cashequity of the guarantor 1204, or to provide a profit margin to the trust1220 and the guarantor 1204.

The use of the insuring debt 1210 deposited in the trust 1220 is topre-fund, as the bonds are issued, an amount of capital that issufficient to pay (ignoring timing issues) debt service for the fulllife of the portfolio on defaulted insured debt 1209 representing asignificantly greater percentage of the insured portfolio than either(i) the assumed depression scenario defaults or (ii) the actual level offour-year defaults that have historically been covered by monolineequity. In other words, the BECM is much less leveraged than traditionalmonoline insurers due both to the higher coverage of assumed defaultsand to covering that higher level of defaults for the life of the bonds.If permissible under rating criteria, for specific issues of bonds, thecapital required under such criteria (e.g., four years ofdepression-scenario defaults at a minimum coverage of 1.25 times) can befunded with cash only.

Prior to the issuance of Insured Bonds 1209, the available capital canmeet the capital requirement for existing insured debt 1209 after takingaccount of management policies with respect to coverage of assumeddefaults and cash equity. For example, available capital can cover theannual depression-scenario assumed defaults by at least 2 times withInsuring Bond debt service and 1 time with cash equity. Such InsuringBonds can inherently cover the annual depression-scenario assumeddefaults by the same margin not only for the four-year depressionperiod, but for the life of the insured portfolio.

If the available capital were to precisely meet such requirement, thenat the time additional Insured Bonds were issued, additional capitalcomprised of insuring debt 1210 and equity can be identified to coverthe incremental capital requirement relating to such additional bonds sothat upon their issuance, the available capital meets the aggregatecapital requirements for such insured debt 1209 and all outstandinginsured debt 1209 of the guarantor 1204. In the case of an A rated citygeneral obligation bond (1.75% assumed annual depression-scenariodefaults), Insuring Bonds representing 3.5% of the issue, together withcash equity representing 1.75% of annual debt service, can meet theincremental capital requirement for the aggregate insured portfolio.

Note that while the insuring debt 1210 of each issue fund an amount ofcapital that helps to provide the incremental capital required to addsuch issue to the insured portfolio, such insuring debt 1210 may notprovide the credit enhancement that enables the related insured debt1209 to be rated AAA. Rather, the source of the AAA rating for suchrelated Insured Bonds can be derived from the portfolio of nonrelatedinsuring debt 1210 whose debt service can be intercepted by the Insuringtrust 1220 in the event of a default of the related borrower.

The extent to which the very defaults for which protection is sought canadversely affect the protection provided by the Insuring trust 1220 canbe directly quantified. As noted, the insuring debt 1210 can represent amultiple of the assumed defaults under the rating criteria. However,assume that in the overall portfolio the actual defaults equal the samepercentage as the insuring debt 1210, e.g., the insured debt 1209 equal3.5% and the actual defaults equal 3.5% (2 times the assumed defaults).Under those assumptions, 3.5% of both the insured debt 1209 and insuringdebt 1210 can default. So, the non-defaulting insuring debt 1210 can be96.5% of 3.5% of the portfolio and the defaulting insured debt 1209 canequal 3.5% of 96.5% of the portfolio. In other words, even givendefaults much higher than the assumed worst case, the non-defaultinginsuring debt 1210 can be sufficient to fund the insured default. If wewere to assume a default equal to the typical default tolerance of atraditional monoline, 1.5 times 1.75% or 2.625%, the non-defaultinginsuring debt 1210 can equal 97.375% of 3.5% or 3.408% of the entireissue. The defaulting insured debt 1209 can equal 97.6% times 3.625% or3.533% of the issue. So the non-defaulting insuring debt 1210 can coverthe defaulting insured debt 1209 by 1.34 times. Moreover, a 2.625%default over four years can wipe out the capital of the traditionalmonoline, which may have to raise additional capital to maintain itsclaims-paying ability. Whereas, the BECM can continue to have insuringdebt 1210 in subsequent maturity and do not, in one embodiment, sufferany diminution of its claims-paying ability.

Cash capital is also required to achieve a AAA rating. In oneembodiment, the cash portion of the BECM capital will be held by aseparate public or corporate entity associated with and managed by thecomputer component guarantor 1204. Such cash capital will be critical tosupporting BECM during its start-up phase, when the insured and InsuringBond portfolio is too small to compensate for loss anomalies that canarise within statistically small portfolios. It will also be needed tocover payment timing differences between insured debt 1209 and insuringdebt 1210 that are not of the same bond series and payment date. Anydraw on the guarantor 1204's cash capital can be reimbursed by the trust1220 from intercepted debt service payments on insured debt 1210.Consequently, the risk to cash capital under the BECM is far lower thanin a traditional monoline structure since such capital is protected bythe insured debt 1210, which are structured at a level in excess of therating agency(s) 1214's AAA criteria.

In one embodiment, the initial amount of cash equity (e.g., $200million) can meet the rating agency(s) 1214's historical criteria forawarding a AAA rating to a start-up monoline insurer. Although theoverall leverage of Insuring Bond and cash capital is much less thatunder a traditional monoline structure, the amount of leverage viewedagainst cash only is much higher. The amount of cash equity which may beappropriate to allocate to each insured credit, in one embodiment,equals the amount of one year's assumed defaults, or 1.75% in ourA-rated example above. By contrast the capital allocation under aconventional monoline structure can be 1.5 times 1.75% for a four-yearperiod, or six times the allocated cash equity under the BECM.Accordingly the bond insurance capacity under the BECM per dollar ofcash equity is a multiple of the insurance capacity per dollar under atraditional approach.

Guarantor obligations to insured bondholders 1202 in the event of aborrower default are payable to the issuer(s) 1206-108's bond trustee1218 or paying agent and can be covered by available assets in thefollowing priority order:

-   -   Payments on related and unrelated insuring debt 1210 made        available by the trust 1220    -   Draws on liquidity facilities of the guarantor 1204 or Insuring        trust 1220; such facilities can be secured by the trust 1220's        right to intercept debt service payment on the insured debt 1210    -   Draws on cash capital of the guarantor 1204 to the extent needed        to (a) address payment timing differences of insuring debt 1210        and insured debt 1209 of different series and (b) support        guarantor 1204 payment claims in the remote likelihood that        insuring debt 1210's funds are depleted.

In general, guarantor 1204 can include any computer implementedcomponent configured for guarantying a default by issuers 1206-108.Guarantor 1204 can include databases or other software combined withhardware for using over network 1206 for sending and receivingnotifications of a sufficiency of funds in trust 1220, a need for payingan insured amount, interest or fees for guaranteeing the payment, or thelike. In one embodiment, guarantor 1204 may be configured for receiving,over the network 1206, a payment by the trust 1220 for insuring theinsured debt 1209; receiving an insuring trust payment in an amount ofthe defaulted insured debt service; and routing to the trusteecomponent, based on the received insuring trust payment, a defaultamount sufficient to satisfy the obligation on the insured debt 1209. Inone embodiment, guarantor 1204 may be configured for receiving, over thenetwork 1206, an upfront payment from the issuer component 1208 forguarantying the insured debt; pre-funding at least a portion of theinsuring trust 1220 with funds from the first loss class holder of lossclass 1221 that are received in exchange for a first electroniccertificate (e.g., held by trust certificate holders 1216-1217) for thefirst loss class 1221; receiving a contractual record indicating a rightto receive a portion of the principal and interest in the insuring debt1210's cash flow, if the default occurs; sending, to the insuring trustcomponent 1220, a portion of the upfront payment, wherein the portion ofthe upfront payment is configured to be paid by the insuring trustcomponent 1220 into the defaulted insured debt service if the defaultoccurs. In one embodiment, guarantor 1204 may be configured forreceiving, over the network 1206, a portion of interests in at least oneof a plurality of debts managed by the insuring trust component 1220.

FIG. 12B shows a process and data flow between the various componentsupon issuance of insurance of the debts. The data transfers shown can beperformed over network 1206 between computer based components. As shownin FIG. 12B, issuer 1206 may issue “one” issue of bond 1211 with twoseries, by sending bonds information for 100% of bonds to component 1211using data transfer 12012. Bond component 1211 may issue a percentage ofthe bonds (e.g., 97%) to series A insured debt 1209 using data transfer12010. Series A insured debt 1209 issues the bonds (e.g., 97% of thebond 1211) to public bond holders 1202 using data transfer 12006. Publicbond holders 1202 then pays the net proceeds (e.g., 97% of the proceedsfor bond 1211) to series A Insured Bonds using data transfer 12008.Series A insured debt 1209 then sends the net proceeds to bonds 1211using data transfer 12010.

Bond component 1211 may issue another percentage of the bonds (e.g., 3%)to series B insuring debt 1210 using data transfer 12020. Series Binsuring debt 1210 then issues the bonds to BECM insuring trust 1220using data transfer 12022. BECM insuring trust issues certificatesassociated with at least some of the bonds to trust certificateinvestors 1216 (and/or 1217) using data transfer 12026. Trustcertificate investors 1216 pays net proceeds (e.g., 3% of the proceedsfor bond 1211) for the trust certificates (associated with the InsuringBonds) to BECM insuring trust 1220 using data transfer 12028. BECMinsuring trust 1220 pays the net proceeds to series B insuring debt 1210using data transfer 12024. Series B insuring debt 1210 pays the netproceeds to bond 1211 using data transfer 12020. Bond component 1211then pays the 100% of net proceeds by combining the net proceeds fromseries A insured debt 1209 and series B insuring bonds 1210 to issuers1206 using data transfer 12014.

Issuers 1206 may send an upfront premium (CES) to guarantor 1204 usingdata transfer 12016. Guarantor 1204 may send a portion of the upfrontpremium paid to the BECM insuring trust 1220 using data transfer 12032.BECM insuring trust 1202 may retain the portion of the upfront premiumand may create a record indicating a right to receive a portion of theprincipal and interest of Insuring Bonds, including series B insureddebt 1210, in the vent of default of at least one of Insured Bonds,including series A Insured Bonds. BECM insuring trust 1202 may send therecord indicating the right to guarantor 1204 using data transfer 12030.In response, guarantor 1204 may create a guarantee record for use inguaranteeing a debt, including series A Insured Bonds 1209. Guarantor1204 may send the guarantee record to issuers using data transfer 12018.

Issuers 1206 may send information to the guarantee record for the seriesA insured debt 1209 to guarantee 1203 using data transfer 12002.Guarantee 1203 may then monitor and manage the guarantee of the series AInsured Bonds and may route appropriate payments to pay the interest,coupons, principal, or other obligation for series A Insured Bonds 1209.Guarantee 1203 may send a mechanism for receiving the guarantee toseries A insured debt 1209 using data transfer 12004. The mechanism mayinclude a password, identifier, or the like, to identify the guaranteeobligation to series A Insured Bonds 1209.

FIG. 12C shows a process and data flow between the various componentsduring the on-going cash flows of the BECM. As shown, issuers 1205 paysprincipal and interest to trustee 1218 using data transfer 12034.Trustee 1218 pays the insured principal and interest payments to seriesA insured debt 1209 using data transfer 12036. Series A insured debt1209 pays the repayment to the public bond holders 1202 for the bondsusing data transfer 12038. Trustee 1218 also pays the uninsuredprincipal and interest and interest payments to series B insuring debt1210 using data transfer 12040. It should be noted that the upfront CEpremium plus the interest on the uninsured bonds are similar or evenequivalent to the monoline insurance premium and may equal a targetedpercentage of the benefit of insuring the issuer's entire bond issue.The series B Insuring Bonds sends the payments to BECM insuring trust1220 using data transfer 12042. The BECM insuring trust 1220 sendsrepayments to trust certificate investors 1216 using data transfer12044. The BECM insuring trust 1220 also sends a portion of the interestpaid to the guarantor 1204 using data transfer 12046.

FIG. 12D shows a process and data flow between the various componentsupon issuer default. In this scenario, one of issuers 1208 defaults on apayment for insured debt 1209. Issuers 1206 pays non-defaulted principaland interest payments if any to trustee 1218 using data transfer 12050.Trustee 1218 pays a pro rata share of the non-defaulted uninsuredprincipal and interest payments to series B insuring debt 1210 usingdata transfer 12054. Series B insuring debt 1210 pays a pro rata shareof payments to BECM insuring trust 1220 using data transfer 12062. BECMinsuring trust 1220 pays payments equal to the defaulted insured debtservice to guarantor 1204 using data transfer 12060. BECM insuring trust1220 may also pay a payment due less defaulted insured debt service tothe related trust certificate holders 1216 who hold the insuring debt1210 that are related to defaulted Insured Bonds 1209. BECM insuringtrust 1220 may also pay a payment due less defaulted insured debtservice net of payments made for related Insuring Bonds (e.g.,previously made) to the non-related trust certificate holders 1217 whohold the Insuring Bonds that are related to defaulted Insured Bonds1209. Guarantor 1204, using at least a portion of the payments receivedusing data transfer 12060, sends a payment to make up deficiencies inthe series A bonds' payments to trustee 1218 using data transfer 12058.Trustee 1218, using the received payment from data transfer 12058, sendspro rata share of non-defaulted insured principal and interest paymentsto series A insured debt 1209 using data transfer 12052. Series Ainsured debt 1209 sends a pro rata share of repayments to public bondholders 1202 using data transfer 12056.

FIG. 12E shows a process and data flow between the various components ofanother embodiment of the BECM system. This system configuration issimilar to the systems described above, except that the system includesBECM (BECM) holding company computer system 1230, BECM (BECM) ManagementLLC computer system 1232. Holding company 1230 holds a plurality ofcompanies/guarantors. Moreover, BECM Acceptance Company (Guarantor) 1204is configured to operate as a regulated company for insurance lawpurposes and holds adequate regulatory capital as required by insurancelaw. Guarantor/regulated company 1204 is paid an upfront insurancepremium by issuer 1206.

BECM Capital Trust (BECM insuring trust) 1220 also includes additionalsources of liquidity 1243, rating agency capital 1242 that is sufficientto satisfy a rating agency's amount of capital to rate the trust apre-determined rating (e.g., AAA), and default determination mechanisms1241. Proceeds from the sale of the trust certificates 1216/1217 arepaid, for each trust bond(s) 1210, to the issuer 1206. Trust 1220 isconfigured as a special purpose vehicle.

In operations, issuer 1206 issues (from qualifying investment grademunicipal bond issue) supported bond(s) 1209 and trust bond(s) 1210.Supported bond(s) 1209 pays proceeds to issuer 1206. The trust bond(s)1210 is held in trust by trust 1220. Guarantor/company 1204 ispre-funded with capital, and trust 1220 is pre-funded with liquidity1243 and/or regulatory and rating agency capital 1242. Issuer 1206 payscoupons to supported bond(s) 1209 and trust bond(s) 1210. Issuer 1206also pays a supplemental coupon. Issuer 1206 also pays principal on thetwo bonds. The trust bond(s) 1210's coupons and supplemental coupons arereceived by the trust 1220, because the trust 1220 is the bond holderfor the trust bond(s) 1210. At least a portion of the supplementalcoupons are intercepted to pay the annual guarantee premium. At least aportion of the annual guarantee premium may be diverted to fund ratingagency capital 1242. A remaining portion of the annual guarantee premiumis sent to the Guarantor/regulated company 1204 (e.g., for operations,profits, and/or dividends). Any dividends (e.g., from return oninvestment on regulatory capital or profits) are also paid by regulatedcompany 1204 to holding company computer system 1230.

The unenhanced and supplemental coupons, and principal flow through adefault determination mechanism 1241. If it is determined that theissuer 1206 did not default, the unenhanced and supplemental coupons,and principal flow directly to the certificate holders of the trustcertificates 1216-1217.

If it is determined that the issuer 1206 defaulted on paying thesupported bond(s) 1209, the unenhanced and supplemental coupons, andprincipal are intercepted and sent to the guarantor/company 1204.Additional rating agency capital 1242 and additional liquidity 1243 mayalso be taped and used if the intercepted amounts are inadequate to paythe default. The amounts to cover the default are sent toguarantor/regulated company 1204.

Guarantor/regulated company 1204 then adds more regulatory capital 1244,if there is insufficient funds in the received amounts to cover thedefault. The aggregate amounts are paid to the supported bond(s) 1209'sholders.

If the mechanism of Trust 1220 and/or Guarantor/regulated company 1204were used to cover the default on payments to holders of the supportedbonds 1209, issuer 1206 pays a recovery or repayment for to the trustbond(s) 1210's holder and to the trust certificates 1216-1217's holders.

Based on the ability to cover projected defaults, the trust 1220 isdetermined to have a high rating, for example, a AAA counterparty rating1245. The rating flows to company/guarantor 1204 to givecompany/guarantor 1204, for example, AAA financial strength rating(supported rating) 1246.

Management company computer system 1232 provides portfolio and operatingservices and third-party administration and receives management feesfrom company/guarantor 1204. Services are provided to manage trust 1220,company/guarantor 1204. In turn, management fees are paid bycompany/guarantor 1204 to management company 1232. In one embodiment,management company 1232 can be trustee 1218.

FIG. 13 shows a device for managing the BECM process, issuing insurancefor debt, and the like. Device 1300 includes input/output control 1302,processor/memory 1310, display 1304, issuer manager component 1312,guarantor component 1314, debt insurance component 1316, certificateholder component 1318, trust fund component 1306, rating manager 1308,and network interface 1320. Trust fund component 1306 includes lossclass fund 1341-1342. As shown, the components of device 1300 are incommunication with each other, over, for example, a bus, a network, orthe like. The components are also in communication with other devicesover network interface 1320.

In one embodiment, the various components performs corresponds tosimilar components of FIG. 8. The various components may include asoftware program(s) comprising processor readable instructions that arestored on processor and/or computer readable media, such as the softwareprogram of FIG. 7. The instructions may be stored within memory 1310 andexecuted by processor 1310. In one embodiment, the various componentsare configured to perform at least some of the steps of the methods ofFIGS. 1 to 6, 9 to 11, and 15 to 26.

In one embodiment, the components of FIG. 13 may be programmed withparameters and instructions to reflect the instructions for structuringthe various components of the BECM system in accordance with therequirements of ATTACHMENT A. ATTACHMENT A shows one example of adefinition for implementing the BECM system.

In one embodiment, input/output control 1302 may receive input toinitiate managing a components using the BECM methodology describedherein. Display 1304 may display various interfaces for managing BECMcomponents, such as user interfaces of FIGS. 28 to 32. Issuer managercomponent 1312 can receive and manage information related to an issuer,such as a municipality. Information about the insured debts can bereceived and managed by component 1312. Component 1312 can size theappropriate insuring debt based on the insure debt, for example.Component 1312 can maintain issuer contact information and informationrelated to the details of the bonds (interest, principal, period, etc.)Component 1312 may perform some of the operations of issuer(s) 106.

Guarantor component 1314 can receive and manage information related tomaintaining sufficient capital structure to be able to insure thedefaults of insured debts (bonds). Guarantor component 1314 may performsome of the operations of guarantor 104.

Certificate holder component 1318 can receive and manage informationrelated to certificate holders, and can track the obligations to thecertificate holders. Component 1318 may perform some of the operationsof trustee 118 and/or BECM insuring trust 120.

Trust fund 1306 can receive and manage information related to the moneys(funds) flowing in, out-of, and/or maintained on behalf of thecertificate holders related to various Insuring Bonds. In oneembodiment, the funds may be separated in computer memory based on lossclasses such as loss class funds 1341-1342. Component 1318 may performsome of the operations of BECM insuring trust 120.

Debt insurance component 1316 can receive and manage information relatedto insuring the possible defaults of an Insured Bonds. Component 1316may monitor whether a default has occurred, may intercept coupons for anInsuring Bonds, and send the coupon payments to holders of an InsuredBonds, for example. Component 1316 may request information aboutcertificate holders from component 1318, intercept funds from trust fund1306 based on the information about certificate holders of the insuringtrust, request information about bond holders for the appropriateinsured trust from component 1316, and send the intercepted funds to theappropriate bond holders. In one embodiment, component 1318 may performsome of the operations of trustee 118 and/or BECM insuring trust 120.

Rating manager component 1308 can determine the projected and actualcredit ratings of various BECM components based on the capital adequacyof the BECM components. Data about the capital adequacy can be receivedfrom issuer manager component 1312, guarantor component 1314, debtinsurance component 1316, trust fund 1306 and/or certificate holdercomponent 1318. Rating manager component 1308 can examine the capitaladequacy and determine the credit ratings using for example, the processof FIG. 20 and/or FIG. 23, or any of the other credit ratingdetermination processes described herein.

FIGS. 14A to 14E, and 15 to 25 show underlying data processes, models,and algorithms for managing insurance of debt. In one embodiment, thesteps of the processes of FIGS. 14A to 14B and 15 to 25 can be performedby the components of FIGS. 7 to 13, and/or can use the data modulesand/or user interfaces of FIGS. 29A to 33F.

FIG. 14A shows an example user interface for managing debt insurance andthe application of the BECM to an example data scenario. This scenarioincludes various assumptions. The portfolio comprises 5-year bulletmaturities. The Insuring Bond event-trigger requires a payout in year 5.There are 33% current credit spreads: (3.75%−2.55%)*33%=1.2%*0.33=40basis points (bps). Insured Bonds are configured as “AAA” Insured,$970,000 per GO Issue, MMD Scale, paying over 5 years at 2.55%. TheInsured Bond Portfolio includes a $97,000,000 Portfolio of 100 Issues.Insuring Bonds are configured as “A” GO, $30,000 per GO Issue, MMDScale, paying over 5 years at 3.75%, with 10 bps of insurance premiumsdedicated to coupon (3.23%). The Insuring Bond Portfolio includes a$3,000,000 Portfolio of 100 Issues. As shown, several issues (1 to 100)of Insured Bonds and Insuring Bonds pay their coupons over a period ofyears. Insuring Bonds pays both a coupon (e.g., 3.75%) and a coupon(3.23%). The coupons from the Insuring Bonds can be intercepted to payany defaults for the insured coupons as described herein. The InsuredBonds have two ratings, a “A” underlying rating for the issuer, and a“AAA” insured rating due to the pledged Insuring Bonds payable in eventof default.

FIG. 14B shows another example user interface for managing debtinsurance and the application of the BECM to an example data scenario.As shown, the insured is configured to be a “AAA” guarantee with$1,000,000 par amount, AA GO MMD Scale Proxy, with a 5 year period at anannual 2.25% interest. The pledged or trust or Insuring Bonds are ratedat an “A2” GO, $50,000 par amount, MMD Scale, with a 5 year period at anannual 3.25% interest and an additional supplement coupon at an annual2% interest. As shown, for a plurality of years, the AAA Insured Bondspay a coupon, and pays additionally a principal amount at year 5. The A2Credit Moody's expected loss at each year is also shown along with anBaaa3 Credit Moody's expected loss. Also shown are the pledged or trustor Insuring Bonds and their coupons paid over a period of years. Theavailable intercept amount per single bond for each year is also shown,along with the available intercept for all issues of bonds (e.g., 1000).In this example, the available intercept is much greater than theexpected loss for each issue of Insured Bonds. Thus the amount ofavailable intercept is sufficient to cover the expected loss, asdescribed herein.

FIG. 14C shows another example cash flows between the BECM components,including flows between Company, cash capital of the Trust, thedifferent Insuring Bonds and different Insured Bonds. The examplescenarios show how Insuring Bonds' cash flow are first used to cure thedefault of the related Insured Bonds and how Insuring Bonds in a lowerloss class are used to cure defaults before those in a higher class. Thecash flows of the Insuring Bonds can include a plurality of types ofcoupons, and/or even the principal of the Insuring Bonds. FIG. 14C showsinsured bond 1 with related insuring bond 1 in the first loss class andrelated insuring bond 1 in the second loss class, and insured bond 2with related insuring bond 2 in the first loss class and relatedinsuring 2 in the second loss class. More insured bonds and relatedinsuring bonds and loss classes can be used without out departing fromthe scope of the invention.

At year 0, the Company is paid premiums into the BECM funds to set upthe bond insurance for two bonds—bonds 1, and 2. Each of the bonds hastwo issues each, one for Insuring Bonds, and one for Insured Bonds. Forsimplicity, the loss class includes the loss position or category asdescribed herein, but many more loss classes can be used. The cash flowsof a first Insuring Bonds 1 and 2 are placed in the same loss class 1.The cash flow of the a second Insuring Bonds 1 and 2 are placed in lossclass 2. Also at year 0 cash capital is established. The cash capitalcan be funded with proceeds from the sale of trust certificates thatentitles the holders of the certificates to the cash flow of InsuringBonds 1, 2.

At year 1, all the Insuring Bonds pay a part of their coupons to theCompany funds. Over the course of the years, if an Insuring Bond'sissuer does not default or the cash flow of the Insuring Bond is notintercepted, a portion of the cash flow of the Insuring Bonds are paidinto the Company funds. A remaining portion of the cash flow is paid tothose entitled to receive the cash flow, e.g., certificate holders inthe Insuring Bonds.

At year 2, the issuer of Insured Bond 1 partially defaults. The cashflow of each of the Insuring Bonds 1 in loss class 1 and loss class 2are intercepted and used to pay the Insured Bond 1's holder because theidentity of each of Insuring Bonds 1 are associated to the identity ofInsured Bond 1. If the intercepted funds are inadequate to cure thedefault of insured bond 1, the cash flow of unrelated Insuring Bonds 2are also intercepted and used to pay the Insured Bond l's holder. Theinterception of unrelated insuring bonds 2 are intercepted from lossclass 1 before loss class 2.

Although the cash flow of the intercepted Insuring Bonds are shown asbeing immediately intercepted in conjunction with this FIG. 14C, inother embodiments, the capital used to pay the Insured Bond holders canbe drawn from cash capital or other sources of additional liquidity, andthese draws can be secured by the cash flow of the intercepted cashflow. In one embodiment, the cash capital is used to pay defaults, andis the first to be paid back from the Insuring Bonds cash flow.

At year 3, a portion of the cash flow of Insuring Bond 1 in loss class 1is intercepted to pay the bond holder of Insuring Bond 2 in loss class 1to make them whole for having their cash flow intercepted at year 2.

At year 7, the issuer of Insured Bond 2 fully defaults. Accordingly,there is no cash flow for insuring bonds 2 to intercept. Instead, thecash flow of both the Insuring Bonds 1 in loss class 1 and loss class 2are intercepted, with loss class l's bonds intercepted first. Becausethe intercepted insuring bonds funds are inadequate to cover thedefault, cash capital is partially drained to pay the full default ofInsured Bond 2.

At year 8, the cash flow of Insuring Bonds 2 are intercepted toreplenish the cash capital that was used to pay the default by theissuer of Insured Bond 2.

At year 9, the cash flow of Insuring Bonds 2 are intercepted to makewhole the bond holders of Insuring Bonds 1 for having their cash flowsintercepted at year 6. This payment can be paid pro-rata, or one beforethe other in a pre-defined order. As shown, cash capital is paid beforeInsuring Bond holders 1 are paid.

FIG. 14D shows a calculation for an Aggregate Loss Subclass Percentage.“Aggregate Loss Subclass Percentage” means, for each Loss PositionSubclass and with respect to each maturity of each Supported Bond Issueor Supported Transaction, the Average Annual Assumed Default multipliedby the Loss Subclass Minimum Coverage multiplied by the Loss SubclassDiscount Percentage multiplied by the Loss Subclass Coverage Factor.This represents the sum of the Loss Subclass Percentage Requirements foreach Loss Position Subclass and all of the lower Loss PositionSubclasses. For example, as shown, initially, for an A rated city orcounty general obligation bond issue, the Aggregate Loss SubclassPercentage for the 4th Loss Position Subclass equals 1.75% multiplied by1 multiplied by 100% multiplied by 2.4, or 4.2%. Correspondingly, theAggregate Loss Subclass Percentage for the 3^(rd) Loss Position Subclassequals 1.75% multiplied by 0.8 multiplied by 25% multiplied by 2.4, or0.84%.

FIG. 15 shows a flow chart for a process for managing debt insurance.The process begins at step 1502, where an insuring debt related to aninsured debt based on an insured amount of the insured debt isestablished. The issuer can receive 100% of the proceeds from both setsof bonds, thereby replicating the accepted underwriting process by banksand guaranty role of a monoline bond insurer.

Also to replicate the accepted underwriting process, yields of theinsured and Insuring Bonds can be computed to keep the proceeds the samefor the Insuring Bonds. That is, the yields can be paid in the amount asif the Insuring Bonds have the same yield characteristics as the InsuredBonds and to also to take into account an increase in each year withadditional basis points or coupons to account for the added risk of theInsuring Bonds.

BECM's novel computer controlled capital structure reduces the insurer'sleverage ratio from 100 to 1 to less than 30 to 1 by integratingInsuring Bonds into the capital mix rather than cash set asides, thepractice of all other insurers. Traditional bond insurance technologyrequires $200 million of regulatory capital for guaranty protection onroughly $20 billion of municipal bonds. The same $200 million ofregulatory capital can support approximately $125 billion of municipalbonds using BECM technology.

The Company's computer system and data for using the BECM's creditunderwriting criteria can be pre-established or determined dynamicallyin computer memory for all guarantee commitments. The Company can beconfigured establish other subsidiaries for future “pools” withdiffering credit criteria in fully isolated guarantee companies. Theunderwriting criteria can encompass two screens: (i) credit ratings and(ii) risk categories. Using the BECM methodology, issues can be ratedinvestment grade and can be restricted to the ratings services' mostconservative risk categories, to include the information shown in TABLE4:

TABLE 4 General Obligations Tax-Supported Debt Essential ServiceUtilities * State and City * State-wide Public Universities * SchoolDistricts * Guaranteed Guaranteed Student Entitlements Loans * CommunityColleges Personal Income Tax Federal grant secured

The underwriting credit criteria data can exclude bond issues subject toannual appropriation, in one embodiment.

In one embodiment, as described herein, the BECM uses two sources ofcapital to fund potential defaults: debt service payable on pledgedbonds (e.g., the Insuring Bonds) representing a pro-rata portion of eachmaturity of every Insured Bond issue; and cash capital derived from apublic or private investment. Bond issues that benefit from the BECM canbe subdivided into two parity series which will be sold simultaneously:Insured Bonds sold with the benefit of a Aaa guaranty; and InsuringBonds, representing a pro-rata portion of every maturity, sold on anuninsured basis to an Insuring Trust, which would hold the InsuringBonds of all participating issuers. The Aaa guaranty can be provided bya monoline insurer or similar public or private entity (e.g., theGuarantor), whose credit will be supported by an Insuring Trust.

In one embodiment, the issuer's Insured Bonds can be sold to the publicin a typical manner. The Insuring Bonds would be priced by the issuer atan uninsured interest rate, but not sold directly to the public. Inaddition to the rate, the Insuring Bonds can also bear a interest couponreflecting the annual portion of the cost of insurance. In oneembodiment, Insuring Bonds can be deposited in the Insuring Trust inexchange for payment of the proceeds thereof. The Insuring Trust wouldsimultaneously raise an identical amount of proceeds by selling trustcertificates with respect to each Insuring Bond that pass through allpayments of principal and interest and a portion of the coupon payments.Additional details for this step 1502 are described in more detail inconjunction with FIG. 16.

At step 1504, at least one loss class for the Insuring Trust isallocated. In one embodiment, to permit Insuring Certificates andInsuring Bonds to be priced efficiently, Insuring Certificates andcorresponding Insuring Bonds can be grouped and sized into varioussubclasses. Additional details for this step 1504 are described in moredetail in conjunction with FIG. 17.

At step 1506, an insuring fund of the insuring trust for insuring anobligation to make payments for the insured debt is established.Portfolio credit characteristics can be computed based on a riskappetite and underwriting discipline as well as trends in performance ofthe insured portfolio. An upfront fee (e.g., part of the premium) can bereceived from the issuer for insuring the Insured Bonds. In oneembodiment, the premium can be paid partially upfront and partiallyovertime. In yet other embodiments, the fee may be paid fully upfront orfully overtime.

In one embodiment, the debt insurance may be directed to amunicipal-only issuer with significant additional limitations versusrating criteria: (a) portfolio will overwhelmingly be generalobligation, special tax and revenue bonds rated A or Baa with issuerconcentration limits; (b) credits involving event risk will be avoided,e.g., appropriation indebtedness other that highly structured creditsthat practically eliminate non-appropriation risk; (c) no market valuetermination payments or principal accelerations will be insured that canturn a credit slide into a credit cliff.

Capital adequacy can reflect the ability to meet claims over time at agiven confidence level to meet regulatory minimums and to maintaininvestor confidence. The BECM's system can create capital by structuringInsuring Bonds, whose debt service can be intercepted to fund an insureddefault, into every maturity of every insured issue. For example, BECM'sportfolio of Insuring Bonds can create cash flow coverage that isavailable to fund insured defaults for the full life of the portfolio.Unlike a conventional monoline approach, BECM capital (including all orsubstantially all of the capital) that may be required can be fullyfunded at the time of issuance.

For example, capital can be reduced as bonds are retired or refunded,i.e., in relation to a reduction in the capital requirements. The BECMmay require cash equity for startup capital, for liquidity, and toaddress runoff risk. However, the amount of cash equity needed isgreatly reduced and the cash equity is protected from nonpayment risk bythe Insuring Bonds

In one embodiment, the level of defaults can be structured such that thedefaults can be covered by the Insuring Bonds with a significantcushion. For example, in sizing the Insuring Bonds for all credit types,a deterioration of the portfolio credit quality can occur and the BECMsystem can apply 1.6 times coverage to those conservative capitalcharges. Such coverage of potential defaults can be net of the impact ofany issuer defaults on the Insuring Bonds. In one embodiment, an evenhigher coverage level can be used: 3 times the assumed defaults for Arated GO bonds and 4 times such levels for Baa rated GO bonds.

Profitability can impact the capital adequacy and ability to access thecapital market on reasonable terms. Since under the BECM, capital can bepre-funded with Insuring Bonds and cash for the full life of the insuredportfolio, the impact of future profitability on the BECM credit may bemuch less than on a conventional monoline insurer. Additional cashcapital would be required in order to grow the insured portfolio beyondthe level supported by the existing cash capital. Because the need forcash equity is reduced, the amount of insurance capacity per dollar ofcash equity can be much higher. That is, the BECM can operate with lessdependence on profitability, as compared to monolines.

Because less cash equity may be needed and due to the efficiency of theBECM, the returns on cash equity under the BECM can be higher than for aconventionally capitalized monoline. Such returns can be achieved eventhough (1) the risk to the cash equity is significantly lower than undera traditional monoline structure and (2) without the need to benefitfrom the early redemption of Insured Bonds.

At step 1508, an obligation owed by the insuring fund trust to a firstclass holder is established. In one embodiment, a trust certificate isrecorded in computer memory and the obligation can trigger payments on aperiodic basis and/or as incoming funds for an associated insuring debtis received.

At step 1510, payment payable from the insuring debt to a first classholder is routed based on the obligation owed to the first class holder.Briefly, if a default of a related or unrelated insured debt occurs, thepayment is intercepted, based on the priority described herein. Detailsfor this step 1510 are described in more detail in conjunction with FIG.18.

At step 1512, a credit rating of insured debt is increased based on theestablished insuring fund. A computer implemented algorithm can be usedto compute the increase in credit rating based on the available debtservice for the insured debt and other insured debt managed by theinsuring fund. The algorithm can increase the credit rating based on acomparison of the amount of debt service to a projected annualdepression-scenario assumed defaults percentage. For example, if thedebt service is greater than a multiple, the rating can be increased toAAA.

At step 1514, financial flexibility of entities using the BECM systemcan be improved, thus providing a tangible result and a transformationof the attributes of the BECM components. For example, the BECM mayprovide improved creditworthiness of the entities (e.g., issuer,guarantor, trust, etc.) which can lead to lower interest rates for theentities when they issue debt, for example. Financial flexibilityreflects a company's ability to access liquidity and capital in times ofmaterial stress, including issuer, guarantor, or trust's ability toaccess liquidity. Financial flexibility can be computer as a rate ofaccess to capital. An increase in the flexibility can increase thisrate. The calculated rate can be provided through a computer. Sinceunder the BECM, capital can be pre-funded with Insuring Bonds and cashfor the full life of the insured portfolio, the need for sufficientcapital of the various components of the BECM in times of stress can befully addressed. The Insuring Bond cash flows represent a pledgedrevenue stream that can also be used to obtain additional liquidity inthe form of lines or letters of credit. A conventional monolinestructure has no comparable source of liquidity. The Insuring Bond cashflows also protect BECM cash equity which will make it easier to attractadditional cash equity. In the event of a significant credit event,future Insuring Bonds can be insulated from the impact thereof so thatthe ability to fund capital for future Insured Bonds will not beaffected.

Various aspects of the BECM address other shortcomings identified in theexisting monoline structure. For example, the BECM underwritingstandards can avoid pools of credits with unusually correlated defaultrisk and will be significantly more stringent than those of existingmonoline insurers. The placement of the 1st loss from a defaulted issueron that issuer's Insuring Bonds can provide protection against adverseselection in the insured portfolio and can provide protection to bothunrelated Insuring Bonds and BECM cash equity from the risk of anultimate nonpayment. The pre-funding of capital can avoid the risk thatmanagement will fail to recapitalize in a time of stress. The criticalunderwriting and capitalization decisions of BECM management can beanalyzed and assessed on an ongoing basis based on computer implementedalgorithms.

The use of the BECM Insuring Bond structure implemented with highercoverage margins can provide greatly enhanced ability to deal withassumed annual defaults and with broad declines in portfolio creditquality. The capital of the BECM (including Insuring Bonds and cashequity) may be much less leveraged than the capital of existing monolineinsurers since BECM capital can provide coverage of assumed defaultsthat is higher than under a traditional monoline approach and that runsfor the life of the portfolio. The lower leverage and greater creditstability of the CES can make it a much less fragile and lessconfidence-sensitive. The BECM can offer a higher level of bothprofitability and security than a conventional capital structure.Computing then continues to other steps for further processing.

FIG. 15 may be modified with alternate steps, embodiments, andimplementations as explained below. In one embodiment, at step 1502, thecredit enhancement approach described herein relates to allocating risksamong a class of investments so that the return to one or more “insured”subclasses is guaranteed through the diversion, if necessary, of amountsthat may otherwise be payable to one or more “insuring” subclasses. Thisgeneral method may differ from a classic CDO approach (in which both theinsured and insuring subclasses represent horizontal tranches of a poolof cash flows) as a result of several variations described herein, whichcan be employed separately or together and can be employed incombination with elements of a classic CDO approach. In an embodiment,the BECM system can be configured to perform various operations. Forexample, the BECM system can be configured for employing poolingtechnology to create CDO-like credit enhancement in the primary, ratherthan secondary market. In yet another embodiment of implementing theBECM Structure, the credit enhancement can be provided by the borrowersthemselves.

At step 1504, the insuring subclasses can be structured or allocated incomputer media so that any losses (shortfalls in the actual returnrelative to the guaranteed return) on an insured investment may be borneby the holder(s) of an individual insuring investment or subclass ofinsuring investments that is “related” to the investment with respect towhich the insured loss is payable. So, rather than simply allocating theloss across one or more horizontal tranches in order of their lossposition, the BECM Structure can limit the loss (to the extent possible)to the related investment or subclass (a limited vertical portion of thefull potential horizontal tranches across which losses can potentiallybe allocated). In effect, investors that hold insuring investments whichare related to a particular insured investment are primarily responsiblefor a failure of such investment to produce the guaranteed return. Thenonrelated insuring investors are secondarily liable in the event thatthe related insuring investments are insufficient to produce theguaranteed return. The connection between the insured investment and aninsuring investment or subclass that makes them “related” is that theholders of such related insuring investments have specifically acceptedan investment risk that is the same as or similar to the investment riskon the insured investment on which the loss is payable. The acceptanceof such risk can be either through the purchase of an insuringinvestment with an identical or similar underlying risk or by otherwiseagreeing to provide a guarantee of an insured investment with suchrisks. Insuring investments that are not related to a particular insuredinvestment are intended to provide marketing enhancement for the insuredinvestment and not to bear any material risk from the failure of theinsured investment to achieve the guaranteed return. However, withoutthe secondary guaranty of the non-related insuring investments, thecreditworthiness of the guaranty may not be sufficiently strong tooptimize the pricing of the insured investments. If the risks tonon-related insuring investors can be minimized and if an insuringobligation is identical to its related insured obligation, the insuringinvestor can realize a substantial increase in yield by takingessentially the same risk as if it purchased the underlying investmentdirectly. In the context of municipal bonds, this is possible, bothbecause municipal defaults are extremely rare and if they occur, theyare likely to be temporary—involving timeliness of payment rather than afailure to pay. The increase in yield derived from being an insuringinvestor is achievable because of the marketing enhancement provided bythe non-related insuring investors. The mere subordination of anindividual related investor may produce a modest benefit and so mayresult in a modest increase in yield to the insuring investor who agreesto be subordinated.

At step 1506, the insured subclasses can be structured in computer mediaso that the holder of a particular insured investment cannot suffer aloss unless (a) the performance of that particular investment isinsufficient to achieve the guaranteed return, (b) the performance ofthe related insuring investment is insufficient to fund the shortfall,(c) the enhancement provided by each related subclass of insuringinvestments is insufficient fully to fund the losses on the insuredinvestments related to such subclass, and (d) the enhancement providedby all insuring subclasses is insufficient fully to fund the losses onall insured investments. The insured subclasses, in one embodiment, canbe excluded from any trust or similar structure and can be marketedwithout any yield penalty relative to the trading level of theunderlying security (whether or not insured).

At step 1508, the insuring subclasses may be deposited electronicallyinto a computer account of a trust or similar structure in order tosecure the guarantee. Such a structure might be representative of apublic authority, 501(C)(3) or other tax-advantaged entity. The returnenhancement is provided by configuring algorithmically the insured bondsthe beneficiary (either directly or indirectly, e.g., by using thecredit enhancement to secure more traditional return enhancement such asbond insurance) of the credit enhancement provided by the trust. Thedifference between the unenhanced and enhanced returns on the insuredsubclass is electronically diverted to the insuring investor withoutdepositing the insured investment into a trust (e.g., having thediversion done by the issuer of the underlying security by providing fora higher interest coupon on the insuring subclass). In one embodiment,the impact of the higher coupon on the inflation-adjusted return of theInsuring Obligations for first-loss Insuring Obligations include anincrease in the real return that can range from 20% to over 100%

Both the investor whose return can be guaranteed and the investor whoseinvestment is used to secure the guarantee are owners of the underlyinginvestments either directly (particularly in the case of the former) orindirectly through a trust, partnership, public entity, 501(c)(3), orsimilar structure.

Computer readable media can record and configure that the issuers of theunderlying investments agree to divert a portion of the savings realizedthrough the guarantee of the return of the insured investments to theowners of the investments that secure the guarantee. There may be areallocation of a part of such portion of the savings among thesubclasses of the investors whose investments secure the guarantee basedon various factors such as the degree of risk taken by such subclasses.

In yet another alternate embodiment, the trust certificates can befunded with a supplemental coupon on the Trust Bonds. At least an annualportion of the Insurance Premium is funded as a separate series ofBonds—Series C—(e.g., small series) on parity with the Supported Bonds(Series A) and Trust Bonds (related to Series B). If sold to the publicin order to fund the insurance premium, Series C would be a typicalmunicipal issue. Series C would be delivered to the Trust in payment ofthe annual portion of the insurance premium. The BECM enabled computersystem can be configured so that the unamortized portion of the Series Cbond could be callable by the issuer without payment on any call date onwhich the Supported Bonds and Trust Bonds were called.

In this embodiment, splitting interest is avoided, because Series Ccould have small denominations (e.g., $1000 or $100 or $1) such that thebonds (together with the interest thereon) can be allocated amongvarious uses (i.e., supplemental certificate payments and net annualBondModel Premium) without splitting interest coupons. For example, theSupported Bonds could be $95, the Trust Bonds $5, and the Series C Bonds$1 million. Certificate Holders would pay $5 million to purchase theTrust Bonds and 40% of the Series C Bonds in the total amount of$5,400,000. The different Loss Position Subclasses of Trust Certificateswould own different percentages of the $400,000 so as to createdifferent effective yields to the various loss positions.

In yet another embodiment, rather than using a separate bond issue(Series C) to fund the Supplemental Coupon, the size of Series B couldbe increased to accomplish a similar result. In one embodiment, theSeries B bonds can be discounted bonds.

In an alternate embodiment, the process of FIG. 15 can be modified suchthat the use of a trust or similar structure may be avoided completely(so the investors whose investments secure the guaranteed can own suchinvestments directly) by imbedding the mechanism through which theguarantee is provided in the legal documents of the issuers of theinsuring investments. Alternately, the pooling of the insuringinvestments can be done through a public entity. In another alternateembodiment, the process of FIG. 15 of allocating risk can also beapplied to other types of investments (such as equities) to produce (a)insured” subclass(es) of investments with returns that are lower thanthe expected return on the underlying investments, but are also morecertain and (b) “insuring” subclasses of investments with leveragedreturns.

The variations described above can be utilized so that (1) any lossesfunded by “insuring” investors are imposed to the extent possible on theholders of investments that are “related” to the investment on which theinsured investor's loss is realized and (2) an individual “insured”investor's risk of loss requires the failure to produce the guaranteedreturn of both the related investment (including the insuring portionthereof) and the enhancement provided by the related and non-relatedinsuring subclasses. Application to a particular class of investmentsmay be configured such that the related insured and insuring investmentswill produce the guaranteed return on the insured investment and thatthe entire class of insured and insuring investments will produce theguaranteed return on the class of insuring investments. In yet anotherembodiment, an application in the context of equities may be to take aset of stocks of companies with strong expectations of earnings growthand have the insuring securities insure the earnings growth allocated tothe insured securities.

In the embodiment, at step 1514, the resulting insured investment willresult in characteristics like insured bonds.

In yet another embodiment, the BECM system can be configured to utilizea structured credit enhancement approach to compete with municipal bondinsurers in the primary market.

For GO bonds, because the required size of the insuring tranches issmall, the benefit of the credit enhancement (which is realized only onthe principal amount of the insured tranches) is maximized relative tothe benefit of bond insurance which is realized on the full amount ofbonds. In fact, given working estimates of the additional yield requiredto be paid to the insuring bonds, a structured credit enhancementproduct may be significantly more efficient than bond insurance for suchcredits, which represent the largest segment of the market. For creditslike hospital bonds, the structured approach may produce returns thatare still superior to bond insurance. The ability to produce superiorresults across the full range of credits is a transformation ofresources of the BECM and a tangible result.

FIG. 15 may be modified with alternate steps, embodiments, andimplementations as explained below. At step 1502, in yet anotherembodiment, the objective of the BECM structure (“Structure”) is toprovide credit enhancement of a substantial portion of specified bondissues (Included Issues) sold by borrowers by additionally securing suchportions (Insured Obligations) with payments that may normally bepayable to the holders of all or a portion of the remaining bonds of theIncluded Issues (Insuring Obligations). A portion of the bonds (NonObligations) may be neither Insured Obligations nor InsuringObligations, i.e., an unenhanced and unburdened portion of the issue.

The holders of Insured Obligations (Insured Owners) may have severallevels of security. First, each Insured Owner may own a bond (the“related” bond) of a borrower (the “related” borrower) who sold anIncluded Issue (the “related” issue). Second, each Insured Owner mayhave a priority in the payments received from the related borrower overthe holders (“Insuring Owners”) of (i) Insuring Obligations of therelated Included Issue (the “related” Insuring Obligations) and (ii)both Insured and Insuring Obligations of any other (i.e., a“nonrelated”) borrower. Third, each Insured Owner may be additionallysecured by the credit enhancement provided by Insuring Obligations ofnonrelated borrowers (i.e., “nonrelated” Insuring Obligations). Thecredit enhancement provided by the BECM Structure may operate similarlyto municipal bond insurance in that an Insured Owner could notexperience a payment default without both (a) a default by the relatedborrower on the bond owned by the Insured Owner and (b) the creditenhancement provided by the Insuring Obligations also beinginsufficient. (In some circumstances, the Insuring Obligations relatedto particular Insured Obligations may be from a different bond issue andmay be obligations of a different borrower.)

At step 1504, Insuring Obligations can be structured by tranching theminto classes in a traditional CDO fashion—i.e., 1st loss through nthloss—with appropriate returns for each class. Distinctions from thetraditional context in which CDOs have been structured are, first, thatmost, if not all, of the tranched securities will be investment grade orbetter on their own, without the benefit of tranching, second, thatadditional securities will be continually added to the CDO tranches onan ongoing basis, and, third, that all of the tranches (including thebottom or first loss tranche) may be securitized and sold to the public,rather than having the bottom tranche owned by an equity holder.

The traditional approach can be implemented by, first, sizing theaggregate amount of Insuring Obligations according the requirement tomaintaining AAA ratings on the Insured Obligations. A portion of theInsuring Obligations can also be (1) Insured Obligations at the AAlevel, rather than the AAA level, (2) Insured Obligations at the Alevel, (3) Insured Obligations at the BBB level, and (4) InsuredObligations at rating levels below investment grade. In the traditionalcontext, it may not be normal to view the AA obligations as both insuredand insuring since they are simply entitled to receive cash flowsavailable from the underlying portfolio of securities after the AAAobligations are paid.

In one embodiment, to maintain the interest on the Insuring Obligations,the obligation holders are configured to own or have rights to the cashflows from particular bonds (not just the rights to a certain priorityin the aggregate cash flows) (e.g., step 1508). Thus, the InsuringObligors are configured to have the right to the cash flows from aparticular security and a contingent obligation to permit those cashflows to be diverted to ensure the payment of Insured Obligations atstep 1510. Second, the underlying bonds will in most cases haveinvestment grade ratings and unlike the investments that are typicallysecuritized in CDOs, can be sold to the public on an unenhanced basis.

In one embodiment, the market identity of the individual InsuringObligations or subclasses thereof are retained. Also, because of theunderlying ratings and the municipal context (extremely low probabilityof default and high probability of resumed payments even if a defaultoccurs) the amount of Insuring Obligations necessary to support AAAratings on the Insured Obligations is small. These factors may allowAA-rated tranches of Insuring Obligations to be constructed either withor without (in the case of AA underlying securities) such tranches beingenhanced by lower-rated tranches of Insuring Obligations.

The result of structuring the Insuring Obligations (in addition tosupporting AAA ratings on the Insured Obligations) may be either tomaximize the ratings or minimize the cost of funds on the InsuringObligations or, correspondingly, to minimize the impact of the BECMStructure on the ratings and cost of funds of the Insuring Obligationsas compared to the ratings and cost of funds of the underlying bonds ifsold on an unenhanced bases (i.e., as Non Obligations).

Under a traditional approach, the cost of the BECM Structure might beminimized, relative to the cost of unenhanced bonds, by allocatingInsuring Obligations related to a particular underlying bond to ratingsubclasses equal to and higher than the underlying rating on such bond.The cost can further be minimized by allocating as much as possible tothe rating class(es) higher than the underlying rating. However, toenhance the ability of the BECM Structure to withstand downgrades of theunderlying portfolio under severe economic conditions, it may be prudentto allocate a portion of the Insuring Obligations related to particularbonds to one or more lower rating categories. This may be in effectanother form of coverage. Under normal circumstances there may bedowngrades and upgrades occurring simultaneously.

Because the underlying bonds are individually rated, approaches tostructuring the Insuring Obligations based on the rating of theunderlying related bond can be developed. For example, rather thanhaving the AA Insuring Obligations be enhanced by the lower ratedInsuring Obligations, the AA Insuring Obligations can simply be relatedto bonds with ratings in the AA rating category. Thus, no enhancementmay be necessary to achieve the AA rating level provided that the use ofsuch Insuring Obligations to enhance the AAA Insured Obligations did notadversely affect their ratings. No adverse impact may occur if theInsuring Obligations rated below AA were sufficient to enhance all ofthe lower-rated Insured Obligations (i.e., with underlying ratings belowAA) at least to the AA level.

In one embodiment, the Insuring Obligations related to bonds can beincluded in a particular rating category in the same rating category ofInsuring Obligations. Thus, the tranche of BBB Insuring Obligations maybe in an amount corresponding to the Insuring Obligations for which therelated Insured Obligations have BBB underlying ratings and may have alower loss position than the tranche for A-rated Insured Obligations.The tranche of A-rated Insuring Obligations may be in an amountcorresponding to the Insuring Obligations for which the related InsuredObligations have A underlying ratings. The loss position of the A-ratedInsuring Obligations may in turn be lower than that for the AA InsuringObligations. Under this structure, each rating level of InsuringObligation may achieve its rating without the benefit of any enhancementby the lower-rated Insuring Obligations.

A step 1512, the ratings of particular Insuring Obligations can beconfigured from two distinct perspectives:

-   -   First, the rating of the underlying bonds that are the source of        security for the Insuring Obligations (“Underlying Ratings”),        and    -   Second, rating resulting from the obligations imposed on such        Insuring Obligations by the BECM Structure to enhance Insured        Obligations and, if applicable, other (senior) Insuring        Obligations and, if applicable, the obligations imposed on other        (subordinate) Insuring Obligations to enhance such Insuring        Obligations (“Structure Ratings”). The Structure Ratings of the        tranches of Insuring Obligations may generally correspond to        their loss positions in the event of a default on a bond related        to an Insured Obligation, i.e., the lower the BECM Structure        Rating, the lower the loss position. So, the lowest rating        category may have the first loss position.    -   With respect to particular Insuring Obligations, the BECM        Structure Ratings (the credit impact of the BECM Structure on        the Insuring Obligation) can be at a higher or lower rating        level than the Underlying Rating. If Insuring Obligations only        enhance Insured Obligations and do not enhance other Insuring        Obligations, from a marketing perspective, the rating of a        particular Insuring Obligation may be the lower of its Structure        Rating and its Underlying Rating. So, if all of the Insuring        Obligations relating to a particular bond are allocated to        rating subclasses at or above its Underlying Rating, the credit        impact of the BECM Structure may be minimal. Note that the loss        position, and therefore the BECM Structure Rating of particular        Insuring Obligations can either be fixed at issuance or can        float with the Underlying Rating.    -   If Insuring Obligations do enhance and are enhance by other        Insuring Obligations, the BECM Structure Rating may govern.

In yet another embodiment of FIG. 15, based on the S&P bond insurerrating criteria, the amount of credit enhancement necessary to enhancethe ratings of BBB or below bonds to the A level is only a portion ofthe credit enhancement required to achieve AAA ratings (step 1502).However, the portion of the credit enhancement required to achieve AAAratings that is necessary to achieve A ratings is greater than theamount required to achieve the AA level which is also greater than theportion necessary to achieve the AAA level.

At step 1504, the Insuring Obligations added with additional series ofInsured Obligations can be allocated among various Structure Ratingcategories of Insuring Obligations based on the minimum requirement ateach rating level to maintain the ratings of the next higher ratingcategory of Insuring Obligations. At each rating level, the InsuringObligations in or below that rating category may have to be sufficientto enhance the ratings of the Insured Obligations with underlying bondsat or below that rating level to the next higher rating (1510). Forexample, the Insuring Obligations in or below the BBB Structure Ratingcategory may have to be sufficient to enhance the ratings of the InsuredObligations with underlying bonds rated BBB or below to the A ratingcategory. Thus, the inclusion of bonds rated BBB or below may not affectthe BECM Structure Ratings of Insuring Obligations in the A or AAcategories.

At step 1504, the use of both Underlying and Structure Ratings (i.e.,lower-rated subclasses of Insuring Obligations do not enhance thehigher-rated subclasses) may allow Insuring Obligations to be pricedbased on spreads to a related bond sold on an unenhanced basis. Thevirtue of assigning a AA Structure Rating to an Insuring Obligation witha BBB Underlying Rating is that the credit impact of the BECM Structureon the holder of such obligation may obviously be minimal, so that theadditional yield required by such holder (relative to an uninsured bondof the related issuer) for participating in the BECM Structure may alsobe minimal. The lower the BECM Structure Rating, the higher the spreadthat may be required relative to an uninsured bond. However, if the BECMStructure Rating is no less than the Underlying Rating, arguably, thespread to uninsured may be modest, even for a low (e.g., BBB) StructureRating.

If the Insuring Obligations with lower Structure Ratings, in addition toenhancing the AAA Insured Obligations, also enhance the InsuringObligations with higher Structure Ratings, the Underlying Rating issubsumed and the rating of the Insuring Obligations may be the BECMStructure Ratings (a “Structure Enhanced Rating”). In this CDO-likeapproach, the ratings (Structure Enhanced) of the Insuring Subclassesmay be maximized. The lowest loss position subclass associated with aparticular Insured Obligation may be configured to be rated at the samelevel as the related bond. Some of the insuring subclasses, related to aparticular Insured Obligation other than the lowest loss subclass, canbe insured with traditional bond insurance. The use of StructureEnhanced Ratings for the Insuring tranches can result in the ratings ofthe Insuring Tranches (even conceivably the lowest tranche associatedwith an underlying obligation) being fixed at the time of issuance. Thisrating stability may allow the pricing of Insuring Tranches to beoptimized. To fix the rating of a BBB tranche, it may be necessary tohave a non-investment grade tranche supporting it.

At step 1508, a method of allocating Insuring Obligations by StructureRating subclass may be to allocate portions of the related InsuringObligations to each rating category at or higher than the rating on theunderlying bonds

A related, but more conservative approach is to allocate portions of theInsuring Obligations related to each rating subclass from the subclasswith the rating immediately below the rating of the underlying bonds tothe AA Structure Rating subclass. This may provide protection in theevent of a severe economic downturn from the credit enhancement notbeing sufficient to maintain the BECM Structure Ratings of the InsuringObligations. Under this approach, allocating an equal portion ofInsuring Obligations to the next lower rating category may be undulyconservative. (Building a coverage factor over rating agency capitalrequirements into the amount of Insuring Obligations created withrespect to Insured Obligation addresses the potential impact of aneconomic downturn on the AAA Insured Obligations and also providesprotection for the BECM Structure Ratings of the Insuring Obligations.)

Another variation (that may also address the potential impact of adverseconditions on the ratings of the Insuring Obligations) is to tie theBECM Structure Rating category/loss position of Insuring Obligations tothe rating of the underlying borrower to which they are related. In theevent that the underlying ratings on an Insured Obligation were changed,the loss position of the related Insuring Obligation can be changed toreflect the change. That may mitigate against adverse selection of thecredits included within the BECM Structure by either rewarding orpenalizing the related Insuring Obligor for any changes in the credit.However, given the significant differences between the credit spreadsfor Insuring Obligations in different rating categories, that approachmight create volatility in the market price of Insuring Obligations.

Another variation on having separate Underlying and Structure Ratings,which may also mitigate against adverse selection, is to keep the BECMStructure Rating categories/loss positions static (based on the initialallocation of Insuring Obligations to various rating categories) withrespect to a default by an nonrelated borrower, but, with respect to adefault by a borrower, to make the related Insuring Obligors bear thecost of the default before any loss is allocated to non-related InsuringObligations. In one embodiment, this does not materially affect theUnderlying Ratings of the Insuring Obligations since it is equivalent tonormal subordination which typically has a one-notch impact at most.However, using this approach may make even more remote the possibilityof any Insuring Obligor incurring a loss due to a non-related borrower.

Also, at step 1508, there may be various subclasses of InsuringObligations including for example subclasses (Loss Position Subclasses)that are required to absorb the dollar amount of a loss in a specifiedorder. So for example, the first loss subclass might be required toassume all losses up to the full amount of the payments owed to it. Anyadditional losses may then be allocated to the second loss subclass, andso on and so forth.

The subclasses can also include subclasses (Loss Category Subclasses)that are required to assume certain types of losses before any portionof the loss is allocated to other nonrelated Insuring Obligations. Forexample, various types of credits might be divided into separatesubclasses based on the underlying credit type and/or rating agency riskcategory (Credit Subclasses). So, any loss on Insured Obligations thatare hospital bonds might be allocated as follows:

First to the related Insuring Obligations (i.e., Insuring Obligationsthat are part of the Defaulting Issue), if applicable

-   -   Second to nonrelated Insuring Obligations for which the        underlying bond is also a hospital bond (i.e., Insuring        Obligations in a “related” Loss Category Subclass—the Hospital        Loss Category Subclass)    -   Third, to nonrelated Insuring Obligations that are part of the        same risk subclass (e.g., the subclass consisting of bonds in        the same “risk category” using S&P risk categories for        determining the capital requirement for bond insurers). Such        Insuring Obligations may also be part of a “related” Loss        Category Subclass with a higher loss position than the Hospital        Loss Category Subclass.    -   Fourth, to Insuring Obligations that are part of a nonrelated        Loss Category Subclass (e.g., Insuring Obligations that are GO        bonds or water and sewer bonds).

Loss Category Subclasses may be further subdivided into Loss PositionSubclasses (e.g., within a particular Loss Category Subclass such asHospital Bonds, subclasses of Insuring Bonds that are required to absorbthe dollar amount of losses in a specified order). The number of LossPosition Subclasses can vary across Loss Category Subclasses and evenwithin a Loss Category Subclass.

In order to minimize the impact of the BECM Structure on the ratings ofInsuring Obligations, there can be distinct Loss Category Subclasses(Rating Subclasses) for each rating category of bonds, e.g., AA, A, BBB,and non-rated

The percentage of obligations that are Insuring Obligations (the“Insuring Obligation %”) can vary across Loss Category Subclasses (e.g.,Credit Subclasses) and, perhaps, within a Loss Category Subclass (e.g.,different Insuring Obligation %'s for different Rating Subclasses withinthe same Credit Subclass).

In a fully developed structure, each Loss Category Subclass mightindependently achieve AAA ratings for the Insured Obligations of thatsubclass without taking into account the credit enhancement provided bythe Insured Obligations of nonrelated Loss Category Subclasses.

Thus, in the event of defaults on bond issues within the GeneralObligation Bond Subclass, no portion of the default might be allocatedto nonrelated Loss Category Subclasses (such as the Hospital BondSubclass) unless without such contribution from the non-related InsuringBonds, AAA-rated Insured General Obligation Bonds may otherwise default.

At step 1512, each Rating Subclass can achieve the immediately higherrating category so that the cross-collateralization provided by InsuringObligations of one Loss Category Subclass to the Insured Obligations ofanother Loss Category Subclass may have minimal or no impact on theratings of such Insuring Obligations.

The one potential obstacle to having each Loss Category Subclassindependently achieve the immediately higher rating is borrowerconcentration. If the rating of a large issuer like NYC falls into a newrating category, it could create a concentration problem for thereceiving subclass. The new S&P pool rating criteria make this problemmuch easier to deal with since the move away from a strict 10% of poolcriteria for determining borrower concentration. A virtue of using thecredit enhancement structure as reinsurance is that the bond insurer cantake any such concentration risk. As new borrowers are added to thereceiving subclass, the concentration issue may quickly disappear. Also,additional cash capital can be allocated to mitigate the concentrationissue.

At step 1514, benefits/issues for issuers include better pricing thantraditional bond insurance. Also, since a portion of the cost of creditenhancement may be funded with annual payments to Insuring Owners andsince in the event of a refunding, no payments may be made on theInsuring Obligations after the call date of the bonds, the issuer mayautomatically avoid that portion of the cost of enhancement in the eventof a refunding. The portion of the cost of credit enhancement that goesto the program can be funded either with ongoing payments or upfrontpayments. Also, ongoing payments can be reflected in higher interestpayments on the bonds related to the Insuring Obligations than areactually passed through to the Insuring Owners.

Other benefits include more credit enhanced bonds since the BECMStructure may facilitate the enhancement of bonds that the bond insurersmay not insure directly. Since bond insurers have the right to approveamendments to issuer's bond documents, it is important for the samecapability to exist within the structure. Processing then continues toother steps.

FIG. 15 may be modified with alternate steps, embodiments, andimplementations as explained below. At step 1502, in yet anotherembodiment of the structure of the BECM, in pricing bonds, the issuerestablishes two sets of coupons and yields for each maturity: (a) Oneset of coupons and yields for Insured Obligations—typical of coupons andyields on typical insured bonds; (b) A separate set of coupons andyields for Insuring Obligations to compensate them for providing creditenhancement of the Insuring Obligations.

Issuer pays an additional insurance premium either up front or overtime. Combination of two sets of coupons/yields plus insurance premiumproduces a lower all-in cost for the issuer than the cost produce byconventionally structured bonds with bond insurance. Issuer agrees touse pro rata redemptions when calling Insured and Insuring Obligationsto maintain the strength of the credit enhancement.

There are several unique characteristics of Insuring Bonds from anIssuer's perspective, that is provided by the BECM system, method, andstructuring. Insuring Bonds are bonds of the same maturity as relatedStructure Insured bonds if they are priced simultaneously. However theInsuring Bonds of each maturity can have a distinct yield from the BECMStructure Insured Bonds because they are priced as uninsured. They canhave an additional coupon that increase the yield, but not the price ofthe Insuring Bonds. They can be called for redemption if they are calledpro rata with the BECM Structure Insuring Bonds or the same maturity.They can be issued in smaller denominations than the BECM StructureInsured bonds. For small loans, the BECM system can be configured eitherto have very small denominations or term bonds comprised of installmentswith different yields.

In one embodiment, denominations can be configured: (a) for smallerissues, the structure may require different denominations, rounding, andterming conventions for insuring bonds; (b) $100 denominations; (c)rounding to the nearest $1; and/or (c) Term bonds might have differentyields on amounts amortized in various years

At step 1512, credit enhancement provided by Insuring Obligations,together with a reduced amount of cash capital, as compared to municipalbond insurers results in AAA ratings on Insured Obligations. Issuerrealizes additional savings relative to bond insurance upon a refundingby recapturing the additional yield on the Insuring Obligations afterthe call date. Insuring Obligations achieve ratings similar (within onenotch) of the ratings on the underlying bonds.

Alternatively, Insuring Obligations can be given two separate ratings,one to reflect the rating of the related bond (a “Underlying Rating”)and another to reflect the impact of the structure on the credit of theInsuring Obligation (a “Structure Rating”). In that case, the yieldspreads for Insuring Obligations versus the related bonds might be basedprimarily on the BECM Structure Rating, e.g., a low spread for a AAStructure Rating and high spread for a BBB Structure Rating. Insuringbondholder receives significantly higher return than uninsuredbonds—analyses performed assume 50 to 200 basis points, depending on thecredit and on the bondholder's loss position.

At step 1514, the spread to insured bonds can range from 57 basis pointsto 300 basis points. Analyses performed include at least two subclassesof Insuring Obligations—the first and second loss positionsubclasses—with average spreads to uninsured bonds ranging from 75 to150 basis points. Thus, the average spreads to insured bonds range from82 to 250 basis points. In each case the analyses performed assume thesame spreads for all maturities of Insuring Obligations. Upon adefeasance of the bonds, the insuring bondholder realizes a significantgain. For bonds refunded immediately like the Commonwealth of Massbonds, the incremental gain over the gain realized if uninsured bondsare refunded might range from 5 points to 15 points. The return on cashcapital under the structure ranges from two to three times the return oncapital for bond insurance, depending on the (a) specific type of creditand (b) how much is required to fund fixed charges. Generally, thebetter the underlying credit, the higher the return on capital for bondinsurance. So, better credits result in higher incremental returns forthe structure.

FIG. 16 shows a flow chart for a process for managing debt insurance. Atdecision step 1602, it is determined if an underlying credit rating forthe insured debt is BBB or better. The rating can be determined by acomputer based analysis of the history of the issuer, the type ofindustry of the issuer, the financial condition of the issuer, or thelike. The rating can be received over a network from a rating agencysuch as Moody's.

At step 1604, an insuring debt amount of the insuring debt is determinedbased on an annual depression-scenario assumed defaults percentage forthe debtor times a multiple. In one embodiment, the Insuring Bondportion of each maturity can be sized so that the debt service thereonexceeds the level of average annual defaults that would occur under adepression scenario. The Insuring Bonds can be further sized to takeaccount of an computed downgrade function of a portion of the insuredportfolio plus coverage (e.g., 1.6 times the amount previouslycalculated). The downgrade function is described in more details inconjunction with FIG. 24 and FIGS. 29A and 29B. Proceeds of the insuredand Insuring Bonds can equal 100% of the amount required by the issuer,just as in any Insured Bond issue. For example, if the Insuring Bondsequal 3.5% of the bond issue, 96.5% of the proceeds would be from theinsured issue and the balance from the Insuring Bonds. Of the cost ofinsurance (e.g., 75% of the benefit), a portion (e.g., 25% of the 75%)would can paid up front, with the balance paid annually as a interestcoupon on the Insuring Bonds.

At step 1606, a proportion of the insured debt amount to the insuringdebt amount is maintained constant, for any payment (redemption) fromthe insured or insuring debts. In an alternate embodiment, the debtservice for the insured debt that is based on the insuring debt(intercepted coupons, principal, etc. of the insuring debt) ismaintained constant for any payment from the insured or insuring debts.In one embodiment, at least a portion of the Insuring Bonds deposited inthe Trust are used at least in part to pre-fund, as Insured Bonds areissued, capital sufficient to pay (ignoring timing issues) debt servicefor the full life of the portfolio on Insured Bonds in an amount greaterthan either: assumed depression scenario defaults; or the actual levelof four-year defaults that have historically been covered by monolineequity. Insuring Bonds of each issue can fund an amount of capital inexcess of the incremental capital charge associated with adding suchissue to the insured portfolio. However, the Insuring Bonds related to aspecific issue may not alone provide the credit enhancement that enablesthe related Insured Bonds to be rated Aaa. The source of that rating maybe based on the portfolio of non-related Insuring Bonds held by theTrust whose debt service can be intercepted in the event of a default bythe related borrower.

At step 1608, the insuring fund is pre-funded with cash equity in anamount of the annual depression-scenario assumed defaults percentage forthe debtor times another multiple (e.g., between 1 and 3). Thepre-funding of capital and the significant level of default protectionfor the life of the portfolio can eliminate concerns with obtainingadditional capital under stress scenarios, can remove the concern withprofitability as a critical metric of the rating assessment, and caneliminate the risk of capital removal other than in a runoff scenario.In a runoff scenario, the Insuring Bonds and cash equity can provideprotection for the life of the portfolio (e.g., 20 years) and arereduced only in proportion to reductions in the insured portfolio.

Computing then continues to other steps for further processing.

FIG. 17 shows a flow chart for a process for managing debt insurance. Atstep 1702, a loss category subclass for at least one of the trust issueddebts is established. Loss category (“LC”) subclasses are configured togroup insuring certificates into groups where the bonds have similarrisks to ensure that: (a) the risk to insuring certificate holders is assimilar as possible to the risk of nonpayment of their underlying bonds;conversely, the risk that cash flows will be intercepted to fund adefault within a riskier credit type may be extremely remote; and (b)the credit strength of Insured Bonds of stronger credit types is notweakened by the enhancement of Insured Bonds of weaker credit types.

Loss category subclasses can ensure: (a) the risk to insuringcertificate holders is as similar as possible to the risk of nonpaymentof their underlying bonds. Conversely, the risk that debt service can beintercepted to fund a default within a riskier credit type may beextremely remote; (b) the credit strength of Insured Bonds of strongercredit types is not weakened by the enhancement of Insured Bonds ofweaker credit types. Loss position subclasses are intended to indicatethe order in which insuring certificate cash flows will be interceptedwithin the same loss category subclass.

At step 1704, a loss position subclass for at least one of the trustissued debts is established. Loss position (“LP”) subclasses areconfigured to indicate the order in which insuring certificate cashflows will be intercepted within the same loss category subclass.

At step 1706, a desired credit rating for at least one trust issued debtis determined. In one embodiment, the insuring certificates (and thecorresponding Insuring Bonds) will enhance the Insured Bonds, but notother insured certificates (or Insuring Bonds). So, the Insuring Bondscan have two distinct rating attributes: (a) the “underlying rating” ofthe issuer of the corresponding bond (e.g., Aaa, Aa, A, etc.); and (b) a“structure rating” or desired credit rating of the insuring LPsubclass—a separate rating that reflects the risk that debt service ofsuch subclass can be intercepted to cure a borrower default. The variousloss position subclasses of insuring certificates and their targetratings are:

5th loss position—Aa

4th loss position—A

3rd loss position—Baa

2nd loss position—Ba

1st loss position—NR

At step 1708, the loss class for the at least one trust issued debt issized based on the loss class subclass, the loss position subclass, andthe desired credit rating. Although the insured portfolio can consist ofconservatively selected bonds rated Baa or better, of which theoverwhelming majority will be rated A or better, the target structureratings of the 1st and 2nd LP subclasses can be below Baa. Such ratingsreflect the possibility of a deterioration in the credit quality of theportfolio; the desire to maintain stable ratings for all of the insuringsubclasses; and rating criteria for monoline insurers with targetratings below Aaa, which include a capital charge for Insured Bonds withratings higher than the monoline insurer's target rating. In oneembodiment, at least some of the LP subclass of Insuring Bonds can beconfigured as a monoline insurer with a target rating equal to itsstructure rating. The function of each loss position subclass is toraise the rating of the portfolio of Insured Bonds to the target ratingof the next higher subclass and, in the case of the 5th LP subclass, toAaa

Since each LP subclass will be sized to raise the structure rating ofthe Insured Bonds to the structure rating of the next higher subclass,the structure related risk to each subclass is the rating of the InsuredBonds achieved by the lower LP subclasses. One embodiment of subclasssizing include:

-   -   1. The 1st to 5th LP insuring subclasses will be sized in        aggregate to raise the structure rating of the Insured Bonds to        Aaa    -   2. The 1st to 4th LP insuring subclasses will be sized in        aggregate to raise the structure rating of the Insured Bonds to        Aa. So, the structure risk to the 5th LP subclass is a Aa        quality risk    -   3. The 1st to 3rd LP insuring subclasses will be sized in        aggregate to raise the structure rating of the Insured Bonds        to A. So, the structure risk to the 4th LP subclass is an A        quality risk    -   4. The 1st LP insuring subclass will be sized to raise the        structure rating of the Insured Bonds to Ba. So, the structure        risk to the 2nd LP subclass is a Ba quality risk

In sizing each of the LP subclasses, the same assumed defaults are used(including assumed portfolio deterioration and coverage) as are used tosupport the Aaa rating of the Insured Bonds. However, the coveragerequired to support the structure rating of each of the LP subclasses islower as appropriate for its target rating:

-   -   5th LP (Aa)—1 time    -   4th LP (A)—0.8 times    -   3rd LP (Baa)—0.64 times    -   2nd LP (Ba)—0.52 times

The coverage for each LP subclass is also affected by the relationshipbetween the rating of the underlying bond and the target subclassrating. If the underlying bond is rated at or higher than the subclassrating, the coverage requirement is a fraction of the multiple statedabove:

-   -   Same rating category—25%    -   1 rating category higher—20%    -   2 rating categories higher—15%    -   3 rating categories higher—10%    -   4 rating categories higher—0%

For example, assume that startup cash equity is $200 million for boththe BECM and a conventionally structured monoline insurer and that bothcapital allocated to an insured issue and capital not yet allocated areavailable to cure a defaults. The BECM can have significantly greatercapital (i.e., capacity to withstand defaults) at every point in timefrom the issuance of the first Insured Bond until the monoline insurer'sstartup capital is fully allocated. The bond portfolio is assumed toconsist of A and Baa rated City GOs. The monoline insurer's capital isfully allocated when $19.6 billion of bonds have been insured whereasthe cash equity available under the BECM will support the enhancement of$136 billion. The BECM's default tolerance significantly exceeds that ofthe conventional monoline at every point in time both over a four-yeardepression scenario and over the term of the bonds

At step 1710, electronic certificates are issued to the first and secondclasses based on the credit rating of the classes, wherein holders ofthe electronic certificates are entitled to satisfaction from theinsuring trust for the trust held debt. The number of electroniccertificates can be issued based on the sizing of the loss class, andthe payments recorded as an obligation in computer media that is due tothe holder of the electronic certificate is based on the a function thatincreases as the loss class position decreases. For example, a holder of2nd LP is paid a higher premium for assuming more risk than a 3rd LPholder. Computing then continues to other steps for further processing

FIG. 18 shows a flow chart for a process for managing debt insurance.FIG. 18 shows an alternate embodiment of at least a portion of theprocesses of FIGS. 1 to 6.

Generally, FIGS. 18 and 19 show a process where portions of the paymentsto certificate holders (e.g., the first and second class holders) arepartially or fully used to cover defaults of related insured debtassociated with a related insuring debt and a first class holder and/oran unrelated insured debt associated with an unrelated insuring debt anda second class holder. In one embodiment, an insuring payment for aninsured debt is provided based on intercepted payment payable from aninsuring debt. In one embodiment, if a default occurs, the InsuringTrust can intercept payments due on the insuring trust certificates(first class holders and second class holders) to cure the default. Inone embodiment, Insuring Bonds can fund a net default equal to theirpercentage of the total portfolio of insured and Insuring Bonds. Forexample, assume that insured and Insuring Bonds equal 96.5% and 3.5% ofeach maturity within the total portfolio and there is a default ofissuers representing 3.5% of the portfolio. In this scenario, thenon-defaulting Insuring Bonds equal 96.5% of 3.5% of the portfolio,which is sufficient to cover the defaulting Insured Bonds, 3.5% of 95.5%of the portfolio. So, the Insuring Bond percentage of the aggregateoutstanding bonds represents the Trust's default tolerance capacity netof a like amount of borrower defaults. In one embodiment, because theBECM can cover a higher level of defaults and will do so for the life ofthe portfolio, it is much less leveraged that the capital of atraditional monoline insurer. A borrower may not be affected by thedefault of another issuer.

In general, upon a default, debt service of insuring certificates can beintercepted to the extent needed in the following intercept order:

-   -   1. Insuring certificates of the same issuer and credit        (“related” certificates)    -   2. Insuring certificates of the same (i.e., a “unrelated”) loss        category subclass    -   3. Insuring certificates of other (i.e., “unrelated”) loss        category subclasses

Making insuring certificate holders primarily responsible for defaultsof the issuer of the related Insured Bond is configured to: (a)discourage adverse selection of bonds in the insured portfolio and (b)make it highly unlikely that insuring certificate holders will eversuffer a nonpayment (as distinct from a delayed payment) due to adefault by a nonrelated issuer and/or nonrelated issuer in a differentloss category subclass.

Referring to FIG. 18, at step 1802, it is determined if a debtordefaulted on an obligation to make payments for a related insured debt.To make this determination, a computer based monitoring system canmonitor cash flows for payments, can receive a signal indicating defaultover a network, or the like. If the debtor defaulted, processingcontinues to step 1804. Otherwise, processing continues to step 1818where a payment from the insuring debt is routed to the first classholder. The process of step 1818 is described in more detail inconjunction with FIG. 19.

At step 1804, a payment payable from a related insuring debt in aparticular loss class that is related to the defaulting insured bond areintercepted. Upon a default, debt service of insuring certificates canbe intercepted to the extent needed based on the above describedintercept order. Future payments by of the defaulted amounts can beapplied to reimburse insuring certificate holders in the reverse of theintercept order.

A portion of the intercepted payments is added to the insuring paymentto cure the default. In other embodiments, insuring funds from cashcapital, other unrelated payments, or the like can also be added to theinsuring payment.

At decision step 1806, it is determined if the related insuring fund'sintercepted payment is sufficient to meet the defaulted obligation ofthe related insured debt. A comparison between the amount of the defaultand the intercepted payment is performed. If the determination is yes,processing branches to step 1816. Otherwise processing continues to step1808.

At decision step 1808, it is determined if the next loss class has arelated insuring fund. If so, processing loops back to step 1804.Otherwise, processing continues to step 1810. A computer memory canrecord the ordering of the classes in a rating scale, e.g., within adatabase, or the like. Thereby, the related insuring funds in a lowerloss class are intercepted before related insuring funds in a higherloss class. The determinations of junior or senior holder of financialinstruments (loss classes) are described in more details in conjunctionswith FIGS. 1 to 6.

At step 1810, a payment payable from an unrelated insuring debt in aparticular loss class that is unrelated to the defaulting insured bondare intercepted. Future payments by of the defaulted amounts can beapplied to reimburse insuring certificate holders in the reverse of theintercept order. A portion of the intercepted payments is added to theinsuring payment to cure the default. In other embodiments, insuringfunds from cash capital, other unrelated payments, or the like can alsobe added to the insuring payment.

At decision step 1812, it is determined if the unrelated insuring fund'sintercepted payment is sufficient to meet the defaulted obligation ofthe insured debt. A comparison between the amount of the default and theintercepted payment is performed. If the determination is yes,processing branches to step 1816. Otherwise processing continues to step1814.

At decision step 1814, it is determined if the next loss class has arelated insuring fund. If so, processing loops back to step 1810.Otherwise, processing continues to step 1816. A computer memory canrecord the ordering of the classes in a rating scale, e.g., within adatabase, or the like. Thereby, the unrelated insuring funds in a lowerloss class are intercepted before unrelated insuring funds in a higherloss class. The determinations of junior or senior holder (loss classes)of financial instruments are described in more details in conjunctionswith FIGS. 1 to 6.

At step 1816, the insuring payment is provided. In one embodiment, theinsuring payment is provided over a network, in a computer account, overan exchange, or the like. The insuring payment is provided to at leastone debt holder of the insured debt to cure any defaults by an issuer ofthe insured debt to fulfill an obligation to pay the debt holder.Computing then continues to other steps for further processing.

FIG. 19 shows a flow chart for a process for managing debt insurance.FIG. 19 shows an alternate embodiment of at least a portion of theprocesses of FIGS. 1 to 6. At step 1902, a payment based on anobligation to pay interest or principal on the insuring debt isdetermined for the first class holder based on the obligation owed tothe first class holder. The obligation recorded in computer memory forpayments from the insuring debt triggers a first payment based onconfigured parameters. The payment can then be allocated, and set asidefor payment to the first class holder based on the recorded obligation(e.g., electronic trust certificate) to pay the first class holder. Theallocation and payment, if a trigger occurs, can be recorded in computermemory and can cause a computer system to make the payment as describedin the steps below. Payments can be made over an exchange, in a computeraccount, or the like.

At step 1904, a portion is deducted from the payment to the first holderto cover the default of unrelated debt. When a debt that is unrelated tothe insuring debt but that is insured by another insuring debt defaults,and the other insuring debt's intercepted funds are insufficient tocover the default, the portion to cover the default is deducted from thepayment to the first holder. In one embodiment, the portion covers thedefault completely. In another, the portion can be combined (e.g.,pro-rata) with other unrelated insuring debts that are in the same lossclass to cover the default. Additional details for this step 1904 aredescribed in more detail in conjunction with FIG. 18. While FIG. 18describes the operations with respect to the first class holder that isassociated with the related insured debt, FIG. 18 can be readily appliedto the second class holder that is associated with the unrelated debt.

At decision step 1906, it is determined if a prior payment from anunrelated insuring debt was used to fund a prior insuring payment forthe related insured debt. In one embodiment, the unrelated insuringdebt's payments are obligated to be paid to the second class holder.This situation can occur if, for example, the related insured debtdefaulted on a payment and the intercepted funds from the insuring debtwas insufficient to cover the default, and other unrelated insuring debtpayment was interpreted to pay the default. If the determination is yes,processing continues to step 1908. Otherwise, processing continues to1910.

At step 1908, a portion is deducted from payment to pay the second classholder. The portion can be some or all of the amount that was paid bythe unrelated insuring debt to previously cure the default of therelated insured debt. The deducted portion can be provided to the secondclass holder over a network, exchange, or the like. The deducted portioncan be used to reimburse insuring certificate holders. In oneembodiment, future payments by of the defaulted amounts can be appliedto reimburse insuring certificate holders in the reverse order of theintercept order.

At step 1910, the remaining portion of payment is provided to the firstclass holder. The portion remaining after the deduction described aboveare provided to the first class holder over a network, exchange, or thelike. The portion of the remaining debt service (e.g., coupons) can bepaid as a pass through to the certificate holder of the loss positionfor the Insuring Bonds. The amounts can be stored as an obligation incomputer memory by the trustee of the insuring trust to pay thecertificate holders. In one embodiment, the amounts are not held by thetrust, but rather passed through to the certificate holder. A computerbased mechanism can be programmed to track the fund obligations andpayments. Computing then continues to other steps for furtherprocessing.

FIG. 20 shows another embodiment of a process flow for managing a BECMsystem. At step 2002, the Company's computing resources and system formanaging BECM components are established. Briefly, an insurerestablishes a capital structure within a computer memory of a computersystem, the capital structure designed to minimize risk and structuredwith regulatory capital and a cash stream that is pledged to fund thedefault. In one embodiment, computer operations to manage components ofthe BECM are established, underwriting requirements of BECM componentsare determined, insuring fund intercept functions and conditions areestablished, and monoline functions may also be performed. In oneembodiment, computer resources related to these operations such asdatabase triggers, comparisons, data, or the like are recorded incomputer readable media. Data associated with Insured Bonds, InsuringBonds, liquidity providers, insuring certificates, regulatory capital,payments, and the operations of the company are initiated. Theoperations of step 2001 are described in more detail in conjunction withthe process of FIG. 21A.

At step 2004, the credit rating(s) of various components that uses orperforms BECM methodology is determined. Briefly, a determination ofwhether the established capital structure is sufficient to cover adepression scenario period to obtain a minimal target credit rating forthe insurer is generated, and the target rating based on the generateddetermination is electronically received. In one embodiment, the targetcredit rating is AAA, wherein the investment comprises an Insured Bondissued by an issuer, and the cash stream is produced from an InsuringBond issued that is related to the Insured Bond and that is issued bythe issuer. In another embodiment, the investment comprises at least oneof a debt, a bond or a loan, wherein the cash stream is produced fromthe investment, or a dividend or an account receivable associated withthe investment. In yet another embodiment, the investment comprises apreviously issued bond issued by an issuer, and the cash stream isproduced by an investment unrelated to the issuer and is used asre-insurance for the previously issued bond. In yet another embodiment,determining the credit rating can include increasing in the at least onecomputer memory the credit rating for a first credit based on anincreased likelihood that a payment default can be fully absorbed,wherein the credit rating is representative of a probability of a partyowing the first obligation to make specified payments for the firstcredit to meet the first obligation.

In one embodiment, various capital parameters are examined by thecomputer system. Capital pre-funding is examined, capital adequacy ofthe insurer based on the period at the end of a depression scenario isexamined, capital adequacy of the insurer based on the period during thedepression scenario is examined, and a credit rating of the BECMcomponents are determined based on these various electronicexaminations. One embodiment of the operations of step 2004 aredescribed in more detail in conjunction with the process of FIG. 23.

At step 2006, Insuring Bonds can be appropriately sized for the InsuredBonds. In one embodiment, sizing can include receiving from an issuer,data about the Insured Bond for minimizing the Insured Bond's risk ofdefault; and sizing, by the computer system, an Insuring Bond based onthe received data about the Insured Bond, wherein the sized InsuringBond produces the cash stream that provides the capital structurenecessary to achieve the target credit rating. In one embodiment, thepledged bonds, (e.g., the Insuring Bonds), can represent a portion of atleast some and in one embodiment every maturity and are sized in acomputer readable media using the computer implemented processesdescribed based on the following computer readable parameters:

-   -   Projected depression scenario defaults,    -   Current underlying ratings of the Insured Bond issues,    -   A downgrade function of a portion of the Insured Bonds, and    -   Coverage at or above the level typically provided by monoline        insurers.

This sizing of the Insuring Bonds can also be a tangible result andtransformation provided by the computer system such that the use of thesized amount creates efficiencies for the insurer. In one embodiment, noadditional funds need be raised with the proper sizing, and such propersizing can maintain the appropriate amount of funds available forinsurance so that an appropriate increase in credit rating can beachieved for the Insured Bonds.

In one embodiment, in the event of an insured default determinedelectronically by a computer system, debt service on Insuring Bondsotherwise payable to the Insuring Certificate holders (e.g., theInsuring Certificate Payments) is intercepted within the at least oneelectronic exchange by the Insuring Trust in an amount sufficient tocure the default. Insuring Bonds is recorded in computer readable mediato not be able to be sold by the Trust. Intercepted Insuring CertificatePayments are recorded as available to cure defaults. The operations ofstep 2006 are shown in further details with respect to FIG. 24.

At step 2008, trust certificates for Insuring Bonds are establishedbased on loss classes. In one embodiment, loss category subclasses areestablished, a type of the loss category subclasses are determined,Insuring Bonds are pledged, and trust certificates for the InsuringBonds are issued. In one embodiment, establishing can includeestablishing, by the computer system, a trust certificate, wherein apayment from the Insuring Bond is pledged to be paid to a holder of thetrust certificate.

In one embodiment, the computer system allocates a first credit having afirst obligation to make specified payments and a second credit having asecond obligation to make specified payments, each of the first creditand second credit being in a non-default state when a respectiveobligation is met and being in a default state when a respectiveobligation is not met. In one embodiment, the computer system associatesa first senior holder and a first subordinate holder with the firstcredit using (a) a respective first senior holder financial instrumentthrough which payments from the first credit flow to the first seniorholder and (b) a respective first subordinate holder financialinstrument through which payments from the first credit flow to thefirst subordinate holder. In one embodiment, the computer systemassociates a second senior holder and a second subordinate holder withthe second credit using (a) a respective second senior holder financialinstrument through which payments from the second credit flow to thesecond senior holder and (b) a respective second subordinate holderfinancial instrument through which payments from the second credit flowto the second subordinate holder. In one embodiment, the computer systemstructures the first senior holder financial instrument and the firstsubordinate holder financial instrument in the computer memory to givepriority to payments due the first senior holder prior to payments duethe first subordinate holder in the event the first credit enters thedefault state.

In one embodiment, it is determined, in the computer memory, for thetrust certificate, a type of the loss category subclass, wherein a typecomprises (i) a horizontal loss position subclass wherein a loss thatobligates payment is allocated based on a position within a plurality ofloss position subclasses, with each of the loss position subclassesallocating the loss based on a category rating within that loss positionsubclass, or (ii) a vertical loss position subclass, wherein the loss isallocated based on another position within a plurality of categories,with each category allocating the loss based on a loss position ratingwithin that category. In one embodiment, establishing can includeestablishing a plurality of loss category subclasses; and determining ayield above a coupon amount for the Insuring Bond for each position inthe loss category subclasses, wherein the yield increases as theposition decreases. The operations of step 2008 are shown in furtherdetails with respect to FIG. 25.

At step 2009, the issuer sells the insured bonds.

At step 2010, the Insuring Bonds may be received, by, for example, theCompany, the Insuring Trust, or the like. The Insuring Bonds may beissued by the issuer, segmented from pre-existing debt, or the like.

At step 2012, coupons for Insured and Insuring Bonds are determined andpaid. In one embodiment, in addition to the coupons payable on Insuredand Insuring Bonds, the issuer pays over the at least one electronicexchange a coupon on Insured (and optionally Insuring Bonds)representing an annualized portion (e.g., 75%) of the bond insurancepremium. The premium coupons on Insured Bonds are detached and assigned(within a computer memory) to the Insuring Trust at the time the bondsare issued. In another embodiment, the upfront premium may go to theRegulated Company and not the Insuring Trust. (This discussion assumes,however, that the coupon is payable solely on Insured Bonds, but otherscenarios may be used without departing from the invention.) The balanceof the issuer's insurance premium (e.g., 25%) is paid upfront atissuance over the at least one electronic exchange.

In one embodiment, the Insuring Trust sends the at least one electronicexchange a portion of the annual premium payments as a supplementalcoupon on the Insuring Certificates. The supplemental coupon is based onthe additional risk that the Insuring Certificates Payments may beintercepted (e.g., this obligation is recorded in computer readablemedia) to take the first loss as described in the paragraph below. Thebalance of the premium payments, together with the upfront premium andearnings thereon, is paid over the at least one electronic exchange tothe Company for operating expenses and return on BECM cash capital.After these payments, the remaining annual insurance premiums representthe net revenue to the Company.

At step 2016, it is determined if the debt service payments (e.g.,coupons and/or principal) of Insuring Bonds should be intercepted. Inone embodiment, the determination of whether the payments of theInsuring Bonds should be intercepted is based on a legal obligationrecorded in computer memory. In one embodiment, in the event that theTrustee receives notice from the Company's or from a paying agent of anInsured Bond Issue's computer system, based on a determination of thecomputer system, that insufficient funds are available from the issuerto make timely payment of amounts coming due, the Trustee's computersystem can be triggered to intercept Insuring Bond Payments thereafterreceived by the Insuring Trust. The interception software routines candetermine the interception in the amounts sufficient to assure paymentof all amounts payable pursuant to the Guaranty. If it is determinedthat the payments should be intercepted, processing continues to step2018. Otherwise computing continues to step 2020.

At step 2018, at least a portion of the debt service payments (e.g.,coupons and/or principal) of the Insuring Bonds (e.g., that isconfigured to be paid to certificate holders) is intercepted. In oneembodiment, debt service payments are constrained by the computer systemof the payment to the holder of the trust certificate based on a legalobligation to pay secured holders of a plurality of Insured Bonds, whichincludes the Insured Bonds, wherein the legal obligation is recorded inthe computer memory. The computer system can intercept the payment,based on the recorded legal obligation; and electronically send thepayment to the secured holders, based on the recorded legal obligation.In one embodiment, the computer system uses payments from the secondsubordinate holder financial instrument to perform the first obligationof the first credit for the benefit of the first senior holder to theextent that the first credit enters the default state and payments duethe first senior holder are not available, wherein both the firstsubordinate holder and the second subordinate holder are junior to thefirst senior holder.

In one embodiment, the Trustee's computer system can intercept paymentsreceived with respect to such Insuring Bonds and in such amounts as canbe specified by the Company (e.g., through a user interface) inaccordance with the terms of the Trust. For example, the user interfacewill allow inputs based on the terms of the Trust recorded in computerreadable media.

At step 2020, a recovery or repayment amounts from the issuer aremanaged. If a default of an insured bond of the issuer was covered bythe operations of the BECM system as described herein, the issuer payrepay the covered amounts to the Company and/or the Trust. The recoveryor repayment amounts may be received over a network, stored in computermemory and/or credited to an electronic account.

At step 2022, any (early) redemption of bonds are managed and savingsprovided to the issuer for such redemptions. In one embodiment, it isdetermined if the bonds are redeemed early. The issuer may send anelectronic message to the trust or the Company that the bonds should beredeemed early. The issuer may compute that this early redemption willsave on both fees paid to insure the Insured Bonds as well as interestpayments due to factors such as reduced interest rates, or the like. Ifthe bonds are not redeemed early, processing continues to other steps,including looping back to step 2016 until the end of the term of theinsured/insuring bonds.

Otherwise, the bonds are redeemed and a savings of fees for insuranceare provided to the issuer. In one embodiment, based on an earlyredemption of the Insured Bonds, the issuer realizes savings of feesthat are not paid to the insurer for insuring the Insured Bonds in aremaining period for the Insured Bonds. In one embodiment, the earlyredemption benefit to issuer is that the issuer does not have to makelarge upfront payment as compared to a monoline scheme, and saves onfees upon redemption. The bonds can be redeemed all at once, where bothinsured and Insuring Bonds are redeemed. In another embodiment, theInsured Bonds may be redeemed without redeeming the insuring bonds.Computing then returns to other processing.

FIG. 20 may be modified with alternate steps, embodiments, andimplementations as explained below. In one embodiment, at step 2002,under the structured approach of the BECM, a portion of the capitalneeded to meet rating agency requirements can be provided by theinsuring bondholders (at step 2004). Cash capital is need primarily forliquidity and in aggregate represents a modest percentage (at most 25%and, more likely, 25% of 25% or 6.25%) of the cash capital requirementfor bond insurance. Only a modest percentage of the aggregate cashcapital requirement under the structured approach (e.g., 25%) isactually risk capital, rather than providing liquidity until funds fromthe insuring investments can be intercepted. The return on capital forthe structured approach might be two or more times the return on capitalfor bond insurance, even if all of such cash capital were risk capital.If the returns of risk capital are “leveraged” by providing a lowerreturn for cash capital that only provides liquidity, the structuredapproach provides returns on cash risk capital that are 3 to 5 times thereturns on capital for bond insurance. If the risk capital is given afixed return at least equal to the typical target return for bondinsurance and the net revenues are retained as “program revenues”(representing a return on intellectual capital), such program revenuesmay be substantial. Note that the return on risk capital in thisstructure can both be higher and more certain than the return on riskcapital for bond insurance while still leaving substantial programrevenues.

A distinction between existing monoline bond insurance and the newapproach is that each new insured credit results in an increase in thecapital and diversification of the structured enhancement and,therefore, strengthens the structured credit. Under the monolineinsurance model, each new credit increases diversification but consumesunallocated capital.

At step 2006, by tranching municipal credits (using either a classic CDOapproach or an alternative approach like the method of allocating riskdescribed above) and using the credit enhancement provided by the loweror “insuring” tranches to enhance the higher or “insured” tranches, itis possible to create a new class of high yield securities (i.e., theinsuring tranches) that are unique in that they will have a very lowprobability of default (including failure to achieve its targetinvestment return).

In one embodiment, the primary impediment to creating such a class ofsecurities based on municipal credits is that the credits which are thebest candidates to be included in such a structure (i.e., the creditswith virtually no likelihood of default) are immediately insured in theprimary market (or immediately thereafter in the secondary market) bythe municipal bond insurers.

Other obstacles include (I) the difficulty of stripping interest couponswhile maintaining the portion of the original coupons on the insuredsecurities (i.e., the difference between an uninsured yield and aninsured yield) that are transferred to the insuring securities inexchange for the credit enhancement and (II) converting what may havebeen interest on the insured securities (if they had been uninsured) tocompensation to the insuring securities (e.g., higher interest couponsthereon) without affecting the marketability of the insured securitiesby depositing them into a trust, partnership or similar entity.

At step 2008, in one alternate embodiment, the compensation to theinsuring securities can be in the form of a fee or other payment (paidat step 2018) provided that the credit enhancement is added in theprimary market, instead of payments paid to trust certificates.

A close analog is so-called State Revolving Funds (SRFs). Each state hasan SRF which, from a credit perspective, consist of a pool of municipalloans together with equity held in the form of either cash or loans. Thecredit of an SRF is generally dependent on the ability of the SRF's cashflows to tolerate loan defaults. S&P has published guidelines settingforth the amount of assumed defaults that the program cash flows musttolerate to achieve various rating levels. In general, the more diversethe loan portfolio, the lower the amount of defaults required to beassumed in evaluating the pools default tolerance. The number and typesof loans included within an SRF portfolio are less diversified than inan bond insurer's portfolio, first, because of the lack of geographicdiversity (all borrowers are from the same state) and second, because,in one embodiment, the credits are general obligation bonds are waterand sewer revenue bonds. Due to the reduced diversification, as comparedto the loan pool for a bond insurer, the rating agencies assume that thedefaults may be higher on a percentage basis for an SRF than for a bondinsurer. So, the rating agencies impose higher capital charges on SRFsthan on bond insurers. However, using a structured approach to providebond insurance, the levels of borrower defaults required are configuredin computer memory to be assumed (and the capital charges imposed) to bethe same as for a bond insurer. Based on reports of prior discussionswith the rating agencies, this issue is discussed at length below.

At step 2008, in yet another embodiment, if structured CDO type tranchesof municipal credits (which can be individual credits or groups ofcredits) are combined with existing portfolios of bond insurers, thecombination can be configured as a single integrated portfolio forrating purposes. The bond insurer's capital and the insuring obligationsunder the structured approach (collectively, the “combined insuringobligations”) can be configured together as a single source of creditenhancement. The bonds insured by the bond insurer and the obligationsenhanced by the structure (collectively, the “combined insuredobligations”) can similarly be configured together and configured to becombined insuring obligations as a source of credit enhancement.

The bond insurer's capital and the insuring obligations under thestructured approach can be treated as separate subclasses of thecombined insuring obligations, with specific rules for determining wheneither subclass is used to fund a payment on the opposite subclass ofcombined insured obligations.

The legal framework enforced by software trigger and ̂algorithms forcreating such combined insuring obligations can be set forth in aseparate agreement database or it can be self-contained within thedocument database for establishing the structured approach.

The integration of the structured credit with the existing portfolio caneliminate the startup issues (critical mass of participating borrowers,portfolio diversification, concentration, redemption risk, etc.) thatcan typically be addressed in contemplating a structured approach tocredit enhancement of municipal credits.

At step 2008, in yet another embodiment, because the amount of InsuredObligations may be significantly greater than the Insuring Obligations,the return on the Insuring Obligations, particularly, the first-lossLoss Position Subclass, which may receive a significantly higher returnthan the normal uninsured yield on the related bonds. For example if (i)the Insured Obligations are 85% of the bond issue par of $100, (ii) thebenefit of the credit enhancement/bond insurance is 25 basis points, and(iii) 70% of the benefit of bond insurance goes to the issuer and toprogram costs (leaving 30% to go to the Insuring Owners), then there are85×25×30%=$0.0637 to be allocated among the $30 of Insuring Obligations.

Assuming two Loss Category Subclasses and that the first-loss subclassgets 80% of the benefit: (a) the second-loss subclass may get $0.0128and the first-loss subclass may get $0.051. (b) the yield impact ofthose dollars on the $15 of bonds in each subclass may be 34 basispoints for the second-loss subclass and 136 basis points for thefirst-loss subclass.

At step 2012, the preferred mechanism for compensating Insuring Owners(at least the holders of Insuring Obligations, where possible) is tohave the issuer of the underlying bonds establish a higher interestcoupon/yield for the Insuring Bonds at the time they are initiallypriced. From the borrower's perspective, each maturity of an IncludedIssue may have split coupons/yields—insured coupons/yields on theInsured Obligations and higher coupons/yields on the InsuringObligations—but the borrower may achieve a lower overall cost of funds.In one embodiment, such compensation can be structured as a fee orotherwise and the coupon splitting need not be done at the time of bondissuance.

In one embodiment, enhancement premiums (coupons) can be configured tohave separate premiums for refunding and new money bonds. Theestablishment of the coupons and yields by the issuer can allow thecreation of a subclass of high-yield securities with a very lowprobability of default.

In one embodiment, if any maturity of bonds is called for redemption,Insured and Insuring Obligations can be called pro rata in order tomaintain the strength of the credit enhancement provided by theStructure.

Having split coupons/yields also should minimize legal authority issuesrelating to the issuer making ongoing annual payments for creditenhancement of its previously issued bonds.

In an alternate embodiment, the computer system can structure incomputer memory information about a partnership and configure theInsured and Insuring Obligors to receive distributions of theappropriate cash flows from the partnership. However, the sale ofInsured Obligations that represent interests in a partnership may imposean additional cost (estimated at 25 basis points) versus the sale ofInsured Obligations that are bonds. Such a yield penalty versus bondinsurance may make it impossible to be cost-effective versus bondinsurance. It may be more cost-effective (and certainly simpler) simplyto pay a higher yield on the Insuring Obligations.

If the insured obligations under the structured approach were alsoinsured by a single bond insurer, each additional issue of insured andinsuring obligations may create the following rights and obligations forthe bond insurer:

-   -   At step 2016, an obligation on the part of the bond insurer in        the event that the amounts available under the structured        approach were inadequate to cover payments due on insured        obligations in the event of a bond default.    -   At step 2018, a right on the part of the bond insurer in the        event of a default on included credits in it its portfolio to        receive amounts otherwise payable on insuring obligations. Thus        portions of the bond insurer's cash capital analogous to 2nd        through 4th loss insuring obligations may be protected by the        1st loss insuring obligations under the structured approach.

In this construct, the combining of bond insurers' cash capital andcapital representing bond debt service payable on insuring obligationsis analogous to combining SRFs which use the Reserve model (cashcapital) and the Cash Flow Model (equity invested in loans).

Also, a portion of a bond insurer's capital might be used to provideliquidity for the insuring obligations under the structured approach(which may otherwise require additional cash capital) without adverselyaffecting its timely availability to fund defaults in the bond insurer'sportfolio of credits. Thus, the portfolio integration approach canenable bond insurers to earn an additional return on otherwise idlecapital.

At steps 2020-2022, the Insuring Owners may realize a significant gainin market value upon the refunding of the related Insured and InsuringObligations since the yield on the pre-refunded Insuring Obligations maybe much higher than the normal yield on pre-refunded bonds.

At step 2022, in further embodiments of the BECM system, various optionsmay be configured and/or modified using computer implemented mechanisms.Call Provisions can be configured to: use pro rata between insured andinsuring bonds; structure at least the insuring bonds as noncallable;permit the insured bonds to be refunded, with the refunding bonds tobenefit from the credit enhancement provided by the insuring bonds.

In one embodiment, at step 2004, bond insurer ratings criteria can beapplied to the BECM structuring as follows. The ratings for thecomponents are not “municipal” ratings—e.g., are instead analogous tocorporate ratings; the required default tolerance is 25% of the defaulttolerance for a municipal pool. The ratings can be configured as“insured ratings” obtained for the BECM Structure, which is designed tocompete with bonds insurance and does not look like a traditionalmunicipal pool or a traditional CDO structure. If the BECM structure'senhancement starts with below investment grade borrowers (which may notbe insured by monoline insurers), the Company can seek AAA ratings fromrating agencies other than Fitch, Moody's and S&P, e.g., Duff & Phelpsor AMBest. The Company can receive underlying ratings from one or moreof the traditional agencies to facilitate (a) integration of thestructure with existing insurer portfolios and (b) eventual receipt ofAAA ratings from at least one of the traditional rating agencies.

At step 2004, in yet another embodiment, the ratings can be configuredto incorporate:

-   -   Bond ratings    -   Structure ratings (traditional CDO where the structure doesn't        secure the higher rated bonds)    -   Structure ratings where the structure secures the insured bonds    -   Underlying Ratings    -   Structure Rating—the rating impact of the contribution of        particular Insuring Obligations to the AAA rating of the        Insuring Obligations    -   Structure Enhanced Rating—the rating produced by the combination        of the credit enhancement provided to a particular Insuring        Obligation by the lower loss position Insuring Obligations and        the credit enhancement provided by that particular Insuring        Obligation both to higher loss position Insuring Obligations and        the Insuring Obligation.

FIG. 21A shows a process for managing the operations of the Company forminimizing a risk as to a default on payments associated with aninvestment. At step 2102, operations of the computer system of theCompany are established to manage the activities of various componentsof the BECM. In one embodiment, the Company's computer system can beprogrammed to direct the various activities of the Insuring Trust,subject to the terms thereof, for the benefit of:

-   -   Insured Bonds—beneficiaries of the right to be paid from        Additional Liquidity Instruments, regulatory capital, and        Insuring Bond Payments,    -   Liquidity providers—beneficiaries of the right to be reimbursed        from regulatory capital and Insuring Bond Payments,    -   Insuring Certificates—Beneficiaries of the right to receive pass        through payments of principal, interest, and other portion of        the Insuring Certificate Payments, subject to the right and        obligation of the Insuring Trust to intercept such amounts as        needed to fund insured defaults,    -   Regulatory capital—beneficiaries of the right to be reimbursed        from Insuring Bond Payments, and    -   The Company—recipient of the upfront premium and a portion of        the issuer's coupon/premium payments to pay operating expenses        and to provide a ROE on regulatory capital and infrastructure        capital, with the balance thereof to represent net income.

At step 2103, the capital structure for an insurer performing the BECMmethodology is established. Briefly, regulatory capital is allocated, aninvestment criteria for the capital is selected, additional liquiditysources are determined, and the capital structure of pledged InsuringBonds are determined. The operations of step 2103 are described in moredetail in conjunction with the process of FIG. 22A to 22B.

At step 2104, underwriting determinations are performed. The Company'scomputer system controls underwriting decisions, subject toparameterized requirements, as to which issues to insure anddeterminations regarding the characteristics of Insuring Bonds depositedinto the Insuring Trust, in each case with the parameters configuredfor:

-   -   Maintaining the creditworthiness of BECM's insured credit, and    -   Establishing and maintaining a market identity and trading        levels truly consistent with AAA rating.

At step 2106, the company's computer system can programmed in computermemory with conditions of when payments should be intercepted. Companymandated procedures, as recorded in computer readable media, and used indetermining computer processes described herein, can direct the trusteeto intercept payments or automatically intercept payments on InsuringCertificates as required to fund insured defaults.

At step 2108, the Company's computer system can be configured tointegrate the BECM system into a traditional monoline structure. Oneembodiment of the operations of step 2108 are described in more detailin conjunction with FIG. 21B. In one embodiment, this step may beoptional and not performed. In one embodiment, monoline based operationsare performed. The Company's computer system can also optionally performother functions that are typical of a monoline insurer such as:

-   -   Marketing BECM's credit strength to municipal issuers and bond        investors,    -   Credit analysis of insurance candidates, and    -   Surveillance of the credits in BECM portfolio.

In yet another embodiment, at step 2108, the integration of the BECMstructure with monoline insurers' portfolios is a potential response inthe event that the rating agencies resist applying bond insurer ratingcriteria to the Structure.

One approach may be to have a monoline insurer with the same targetrating as the insured or insuring Structure subclass insure thatsubclass. There may be no capital impact on such monoline insurers sincethe BECM Structure more that meets the rating agency default tolerancerequirements. However the use of monoline insurance may address anyrating agency objections that may be applied to the BECM Structurealone.

In yet another embodiment, another approach may to be to have a singlemonoline insurer credit enhance each (at least all subclass with thesame or a higher target rating than the rating of the monoline insurer)of the BECM Structure insured and insuring subclass. Since the structureindependently meets the default tolerance requirements for the targetrating for each subclass, the monoline insurance commitment is reallyrequired to address rating concerns with diversification and commitment.

In yet another embodiment, at step 2108, an alternative approach tointegrating bond insurance with the BECM Structure may be to combine thecredits under the BECM Structure with the portfolio or portfolios of oneor more existing bond insurers (and/or reinsurers) with the traditionalbond insurers bearing the same responsibilities with respect to theirexisting portfolios of insured credits as the holders of InsuringObligations may bear with respect to Insured Obligations under theStructure. Under this approach the Insuring Obligations may in effectcross-collateralize the insured bonds in the existing portfolio(s) andthe Insured Obligations under the structure may be cross-collateralizedby the bond insurer(s) capital. The bond insurer(s) may in effect playthe role of non-related Insuring Obligors, but certain portions of thebond insurer's portfolio might be in a Loss Category Subclass that isrelated to the defaulting bond. However, the bond insurers may fund anypayments owed by them with cash capital rather than through thediversion of payments due on Insuring Obligations. The objective maycontinue to be to impose any actual loss up to the amount of the capitalrequirement for such credit under the BECM Structure on the relatedInsuring Obligor Any loss beyond such amount may be imposed on theappropriate Loss Category and Loss Position Subclasses, including bothInsuring Obligations under the BECM Structure and bond insurer capitalallocated to such credit and subclasses

Integrating insurer or reinsurer portfolios with the portfolio of astructured credit enhancement product can comprise integration ofinsurer/reinsurer portfolios with the portfolio under the BECMStructure.

This approach can eliminate issues with regard to ramping up the BECMStructure since diversity may be achieved immediately and individualcredits under the BECM Structure can easily be added to the combinedportfolio. It may even be possible easily to add bonds in the secondarymarket to the Structure, including credits for which bondinsurance/credit enhancement may not otherwise be available. TheInsuring Obligations can either be insured by the bond insurer or not.

This approach may enable bond insurers to earn fees from insuring bondsfor which they may not directly provide the risk capital. This resultmay be facilitated by the use of “real” subordination of the InsuringObligations as discussed above and by allocating losses first to anyrelated Loss Category Subclass.

In yet another embodiment, even if the agencies refuse to apply the bondinsurer rating criteria, the same result can be achieved indirectly (atleast for tranches that meet the AAA, AA, and A rating standards forwhich rating levels, traditional monoline bond insurers currently exist)by integrating the relevant tranche of the BECM Structure into theappropriate bond insurer's capital structure. The integration of theBECM Structure with an insurer's capital structure can be accomplishedby the use of both options.

In one embodiment, the Company's computer system can configure theinsurer components in each rating category insure only those bonds inthe tranche of the BECM Structure with the same target rating. In thecase of insuring tranches, the insurance applies to the InsuringObligation related to each bond within the tranche. So, in performingany default tolerance analysis of the insurer's portfolio, the BECMStructure will meet all capital requirements (based on the underlyingbond rating) that are necessary to achieve the insurer's target rating,without requiring any other source of capital. In one embodiment, theBECM Structure represents soft capital, which is limited to 25% of aninsurer's capital structure. But, the better answer is that coveragebased capital (which the structure provides in a transparent way) is notsoft. Even in the more rigorously rated municipal rating sector, nodistinction is made between coverage based and cash based defaultprotection. At every rating level, the source of capital/defaulttolerance is the coverage provided by the lower-rated structuretranches.

This configuration may be sufficient and addresses concerns that couldbe raised about the BECM Structure viewed in isolation: (a) Portfoliodiversification; (b) Institutional commitment; (c) Liquidity.

In this embodiment, the capital within the BECM Structure may not beavailable to support defaults that occur within the non-Structureportion of the Insurer's portfolio. But, the insurers each achieve theirtarget ratings, e.g., AAA. In one embodiment, the BECM Structure isexcluded from the analysis and also pass the same test if the BECMStructure is included. Also, the BECM Structure viewed in isolation cansustain a longer duration default than required for the insurers targetratings.

In one embodiment, the Company's computer system can configure to have asingle insurer, e.g., an A rating insurer, insure the A, AA, and AAAStructure subclasses. Note that the requisite default tolerance isalready achieved by the BECM Structure itself. The monoline insurancecommitment provides liquidity, additional diversity, and addresses therating agency concern with institutional commitment.

In other embodiments, the Company's computer system can be configured tocross collateralize the insurers non-structure commitments with the cashflows of the portion of the structure that is insured by the respectiveinsurer (i.e., the portion which independently meets the same ratingcriteria as are applicable to the insurer's non-structure portfolio).

Processing then continues to other steps.

FIG. 21B shows a process for integrating the operations of the BECMsystem with a traditional monoline system (the “Integrated Structure”).Under the integrated approach, the insured bonds 1209 under theIntegrated Structure can be enhanced by the monoline insurer and boththe cash capital of the insurer and the insuring bonds 1210 under theIntegrated Structure are available to offset defaults with respect toeither set of insured bonds 1209.

In this embodiment, insuring bonds 1210 are not a debt of the monolineinsurer or soft capital. The Integrated Structure is most similar tocollateralized trust funds used as a means to enhance reinsurance.Insuring bonds 1210 are assets that are set aside and legally pledged(not a contractual promise to provide support) to meet the insurer'sobligations. In this embodiment, insuring bonds 1210 are akin to theinsurer taking cash capital and investing it in a municipal portfolio,for example. That would ordinarily be inefficient, versus investing inTreasuries, because the claims-paying impact of the municipal portfoliowould have to be discounted to reflect potential defaults. Given thatunder the Integrated Structure, the credits in the insuring municipalportfolio can be the same as those in the insured liability portfolio,there may no different default assumptions in connection with the assetportfolio than in connection with the liability portfolio. Under theIntegrated Structure, it is efficient to have the insuring assetsinvested in a municipal portfolio (even taking account of the impact ofassumed defaults). Also, the use of a portfolio of insuring tranches ofmunicipal issues on the asset side, results in superior claims payingability to the claims paying ability achieve by using cash under theconventional approach.

The portfolio and capital of the monoline insurer, viewed separately,can achieve AAA ratings. When the insurer's liability portfolio andcapital are integrated with the insured bonds and capital (insuringbonds) under the Integrated Structure, the integrated entity also wouldmeet the monoline AAA ratings criteria. A portion of the monolineinsurer's cash capital meets its statutory capital requirement. Assumingthat the statutory requirement must be met with cash, the statutorycapital structure for insured bonds under the Integrated Structure canbe met with the insurer's cash capital that is above its existingstatutory requirement.

A tangible transformation and result of the integrated structure is todistribute credit risk so that the aggregate risk to each insuringbondholder resembles as closely as possible the credit risk thebondholder would assume by purchasing its particular underlying bond.Exposure to certain risks in the monoline insurer's portfolio can bevery remote from the perspective of the insuring bondholders, e.g., CDOexposure.

Referring to FIG. 21B, the insurer 2124's liability portfolio can besegmented into (I) a portion for which the Integrated Structure capital(intercepted insuring bond debt service) is the last capital applied(the “remote risk portfolio” 2126) and (II) a portion in which theinsuring bonds are more directly exposed to the insured risk of themonoline (the “primary risk portfolio” 2128). With respect to credits inthe remote risk portfolio, the insuring bonds 1210's exposure is to aAAA monoline credit 2122 in that the monoline is rated AAA without theIntegrated Structure and the insuring bonds 1210 would be the lastcapital applied to cure a default in the remote risk portfolio.Similarly, with respect to defaults within the Integrated Structure andthe primary risk portfolio 2128, the allocated capital, including theinsuring bonds 1210, can be required to be exhausted prior to touchingcapital associated with the remote risk portfolio 2126.

The size, diversity and capital associated with the primary riskportfolio 1218 can be such that it, together with the IntegratedStructure insured bonds 1209 and insuring bonds 1210, independentlymeets the requirements for a AAA monoline rating. This is not necessaryfor the purpose of the AAA monoline rating, but may be needed to permitdistinct ratings to be established for different subclasses of theinsuring bonds as described below.

The subdivision of the insurer and structure capital into differentclasses can allow the cost of capital (at least within the IntegratedStructure) to be more efficiently priced. The capital allocated to theprimary risk portfolio and the insuring bonds can be segmented intosubclasses that are applied to cure defaults in a predetermined order.The subclasses could be identified by their loss position, e.g., thesubclass of capital with the 1st loss position would be tapped to cure,a default before any capital belonging to a subclass with a higher lossposition would be utilized. Each subclass can consist of similarproportions of cash equity and insuring bonds. The creation of thesubclasses may allow different ratings to be assigned to the insuringbonds within the various subclasses based on their loss position, whichdetermines the degree of risk that such subclass may be impacted by aninsured default.

Each such subclass (“loss position” or “LP” subclass) can be sized sothat it, together with the lower subclasses contains sufficient capitalto meet the requirements to enhance the insured bonds within the primaryrisk portfolio and the Integrated Structure (collectively the “InsuredBonds”) to a particular rating level.

The criteria for the ratings analysis can be the rating agency criteriafor monoline insurers of various target ratings. However, it may not benecessary to get ratings on the subclasses of insuring bonds from allthree rating agencies. The subclasses can include:

-   -   4th LP subclass—sized to support AAA Insured Bond ratings    -   3rd LP subclass—sized to support AA Insured Bond ratings    -   2nd LP subclass—sized to support A Insured Bond ratings    -   1st LP subclass (senior tranche)—sized to support BBB Insured        Bond ratings    -   1st LP subclass (junior tranche)—sized to support BB Insured        Bond ratings.

With respect to the 1st through 3rd LP subclasses, the size, diversity,and credit quality of the insured bond portfolio, the business strategyfor acquiring additional business, and the access to capital aresignificantly superior to those of a traditional non-AAA monolineinsurer. Currently, the business strategy for a non-AAA monoline insurermust inherently rely on insuring more risky credits that no AAA monolinewill insure. Using the Integrated Structure, however, the fundamentalcharacteristics of even the BB LP subclass are the same as for atraditional AAA monoline.

In analyzing the required size of the insuring subclasses relating to aparticular credit, an issue arises relating to the capital charge (i.e.,assumed defaults) for a LP subclass when the insured bond has a higherrating than the target rating of the subclass. Under the traditionalrating approach to pooled municipal credits, if the target rating of apool were an A rating, no defaults would be assumed for bonds rated at Aor higher. However, a capital charge may be assessed, even if theinsured bond were more highly rated than the insuring entity. Forexample, if the bond is rated one category higher than the monoline, thecapital charge can be 20% of the normal capital charge and the chargecan be 25% of the normal charge if the bond and insurer have the samerating.

The credit quality of each LP subclass (its “structure rating”) isdetermined, not by the rating level that it supports for the insuredbonds 1209, but by the ratings that would be supported for the insuredbonds 1209 solely by the lower subclasses. For example, the 4th LPsubclass is exposed to the risk that the 3rd and lower subclasses maynot be sufficient to cure all insured defaults, which is a AA risk.Under this approach, each insuring bond 1210 can have two ratings: theunderlying rating of the bond and the Integrated Structure rating of theLP subclass of which such bond is a part.

This presence of distinct ratings is different from a traditional CDOapproach under which the insuring subclasses each enhance the higherinsuring subclasses, and so there is one rating, analogous to theIntegrated Structure rating. That traditional approach might beimplemented as part of the Integrated Structure at the point at whichthe size of the Integrated Structure portfolio is sufficient to supportratings on the higher LP subclasses without being integrated with thecash equity associated with the cash portfolio. The reason that it canwork in the Integrated Structure portfolio is that debt service oninsuring bonds that is not needed to fund defaults on Insured Bonds getspaid to the insuring bondholder and does not remain as a part of thecapital under the Integrated Structure. So, any amounts that are notneeded to fund defaults on insured bonds 1209 could be used to funddefaults that affect insuring bonds without any adverse affect on theinsured bonds 1209.

An advantage of having distinct underlying and structure ratings is thatthe insuring bonds 1210 for each bond issue (even those that are part ofthe 4th LP subclass) can take the first loss if that bond issuedefaults, even before the any bonds in the 1st loss LP subclass that arepart of non-defaulting bond issues. This reduces the possibility thatinsuring bondholders associated with a non-defaulting issue will bearthe burden of funding a default on another bond issue.

Under the S&P monoline rating criteria, the assumed defaults for aportfolio of insured credits (which must be covered by the monolineinsurer's capital) are based on the credit quality and credit type ofthe underlying bonds held in the portfolio (See FIG. 26). The assumeddefaults have the same starting point, regardless of the target ratingof the monoline insurer. However, if the insurer's target rating isbelow the underlying rating of an insured bond, a discount is applied tothe normal assumed defaults. As a result of this discount, for anyinsured bond, the LP subclass with the largest capital requirement willbe the subclass whose structure rating is the same as the underlyingbond rating. The LP subclass with the same structure rating, togetherwith the lower LP subclasses, are sized to support the next higherrating for the insured bonds 1209, i.e., sized to cover the assumeddefaults without any discount.

Different minimum coverages of the applicable assumed defaults by theinsurer's capital are required, depending on the monoline insurer'starget rating (or in our case, the target structure rating of the LPsubclass), e.g., 1.25x for a AAA rating, 1.0x for a AA rating, 0.80x foran A rating. In practice, the monoline insurers have capital in excessof the minimum requirement.

Since all of the Insured Bonds under the Integrated Structure and in theprimary risk portfolio are likely to be investment grade, the practicalrisk to the holders of the below investment-grade insuring LP subclassescan be minimal.

Within each LP subclass, credits could be further grouped intosubclasses based on credit types (“loss category” or “LC” subclasses).The loss categories might be based on the various categories of creditsfor which the rating agencies have established different assumeddefaults (i.e., capital charges) based on their perceptions of thedegree of risk associated

-   -   General obligation bonds        -   States; Cities and counties; and Schools    -   Tax-supported debt        -   Sales, gas, excise, gas, and vehicle registration: Local or            Statewide—Health care    -   Utilities    -   Special revenue: Airports, Ports, Parking, Toll roads    -   Housing.

A default of an Insured Bond within a particular loss category subclasscould be allocated, within each LP subclass, first to the cash capitaland insuring bonds within the same loss category and then, if needed tothe capital of different loss category subclasses. This would havelittle to no rating impact, but would reduce the risk that an insuringbondholder could be affected by a default on a riskier credit-type. Anexample of different loss positions and categories and the segmentedbetween (1) the monoline's portfolio and cash capital and (2) theinsuring bonds 1210 are shown in TABLE 5 below. In some embodiments,local sales tax may be split between the monoline's portfolio and cashcapital and the insuring bonds.

TABLE 5 Monoline Cash Capital Insuring Bonds 4th Loss State GO City GOLocal sales tax Airport 3rd Loss State GO City GO Local sales taxAirport 2nd Loss State GO City GO Local sales tax Airport 1st Loss(senior) State GO City GO Local sales tax Airport 1st Loss (junior)State GO City GO Local sales tax Airport

The segmentation of (A) the cash capital into the primary and remoterisk portfolios and of (B) the cash capital and insuring bonds into theLP and LC subclasses may have little or no adverse credit or otherimpact. The segmentation is used to determine the order in which variousportions of the capital structure are applied to cure defaults. Thesegmentation is sued further for:

-   -   In the case of the remote risk portfolio, mitigating market        concerns about exposure of the insuring bonds to riskier credit        types.    -   In the case of the LP subclasses, enabling the various LP        subclasses to meet the monoline rating criteria for specific        target ratings.    -   In the case of the LC subclasses, allocating risk of various        credit types first to insuring bonds of the same credit types.        All of the cash and insuring bond capital would be available as        needed to cure any insured defaults.

The various types of segmentation can facilitate efficient pricing ofthe insuring bonds versus pricing all insuring bonds based on the lowestcommon denominator—the risk that single default may occur within astrong credit type or that defaults may occur within a riskier credittype. The result is that the insuring bondholders can provide marketingenhancement and need not take any material credit risk different thanthe risk of owning their underlying bonds.

A (small) amount of cash equity 2130 may also be required under theIntegrated Structure. The reason for the cash equity 2130 would be toprovide the required capital at the final maturity of the insuringbonds. If all of the bond issues in the Integrated Structure portfoliomatured on the same date, it would be possible to intercept insuringbond 1210 debt service to meet any insured defaults on that date.However, the bonds insured using the Integrated Structure will mature onmany different dates and will have many different payment dates.

Timing issues relating to having different payment dates within eachyear can be addressed by the use of liquidity facilities. However, cashequity 2130 is needed to address the issues at final maturity given thedifferent payment dates. Even if all of the insured bonds matured in thesame year, it might be possible that the bonds that defaulted would bethe last bonds to mature. In that case, (absent some ability to retaininsuring bond debt service in the final year), cash would be needed tocover the assumed defaults.

However, under S&P's monoline criteria, the assumed defaults/capitalcharge in the year a bond issue matures is 25% of the normalrequirement. So, the assumed defaults to be covered with cash equity isequal 1.25 times 25% of the amount of assumed (annual) defaults for theissue. Since the assumed defaults for an issue equal 25% of the totalmonoline capital charge (given the assumption of a 4 year default), theminimum cash equity requirement under the Integrated Structure is 25% of25% (i.e., 6.25%) of the cash equity requirement under a conventionalmonoline capital structure, assuming the same target coverage of assumeddefaults (e.g., 1.50 times). Under the Integrated Structure, fewer bondsare insured that would be insured under a conventional approach (e.g.,95 to 97%). So, the cash equity 2130 under the Integrated Structure willbe closer to 6% of what it would have been if the same bond issue hadbeen insured by a conventional monoline insurer.

In one embodiment, the cash equity 2130 can be sufficient if it equals1.25 times 25% (i.e., 31.25%) of the normal level of assumed 1 yeardefaults. The cash capital 2130 would also be available to meet therating agency 4 year depression-scenario stress test. Over 4 years, theIntegrated Structure cash capital 2130 would be sufficient to cover atleast a 7.81% of the assumed annual defaults. If cash capital werefunded at 1.50 times the assumed defaults in the final year, it wouldcover 37.5% of the normal level of assumed 1 year defaults and would besufficient over 4 years to cover 9.38% of the assumed annual defaults.

There is much less risk associated with the cash equity 2130 under theIntegrated Structure than with the cash equity of a conventionallystructured monoline insurer. In the event of a default, the cash equity2130 would be used only after available insuring bond 1210 debt servicehas been applied, and the cash equity 2130 could be reimbursed byinsuring bond 1210 debt service when received. In essence, the cashequity 2130 under the Integrated Structure is more akin to equity,except in the case of a default at final maturity of the bond issue.

Also, there may be no need for cash equity for bond issues which finallymature earlier that a substantial number of other bond issues under theIntegrated Structure. The ability to intercept debt service on the latermaturing bonds obviates the need for cash equity on the earlier maturingbond issue. Accordingly, over time, the aggregate amount of cash equityrequired under the Integrated Structure can be substantially less than6.00% of the normal monoline cash equity requirement.

Rating agencies may take into account to the presence of municipal riskin both the liability and asset portfolios of the monoline insurer indetermining credit ratings 2122 under the Integrated Structure. Thetotal amounts of assumed defaults for which the combined portfolio andcapital of the monoline and the Integrated Structure will be stressedare known pursuant to the monoline insurer rating criteria. For example,the assumed defaults/capital charge for a BBB city GO issue is 13% oftotal debt service, representing 3.25% in annual defaults over 4 yearsfor insured bonds of that credit type and rating. In determining itsratings, the rating agencies may determine how the aggregate amount ofassumed defaults will be allocated between the cash portion of theportfolio and the Integrated Structure portion of the portfolio.

The sizing of the insuring bonds can take account of both the assumeddefaults and a targeted coverage thereof, which will exceed the coveragerequired for a AAA rating 2122. The minimum coverage of assumed defaultsfor a AAA rating is 1.25 times. If, for example, the targeted coverageis 1.50 times, for all BBB city GO issues, the insuring bonds would needto be at least 4.88% of the issue (or 5.12% of the insured bonds). Giventhat sizing, if 4.88% of such bonds default, the non-defaulting insuringbonds would still provide the targeted 1.50 times coverage for 3.25% ofdefaults of insured bonds. Stated more generally, even if defaults ofbonds under the Integrated Structure were to exceed the assumed defaultsby the targeted coverage amount, the non-defaulting insuring bonds willstill be sufficient to provide the targeted coverage of the assumeddefaults.

There is little to no difference in the legal obligation of the issuerto pay insured bonds 1209 and insuring bonds 1210. In this embodiment,the insuring bonds 1210 are not subordinate to the insured bonds. So theassumed defaults are identical for both insured bonds 1209 and insuringbonds 1210.

The following scenarios help to further illuminate the benefits andpotential issues relating to using municipal insuring bonds within theasset portfolio of a monoline insurer using the Integrated Structure.

Scenario I:

Suppose we compare the default tolerance of two alternative capitalstructures for a mature monoline insurer:

-   -   In the first alternative, the capital structure consists        entirely of cash equity invested in treasuries (“cash”        approach).    -   In the second alternative, the capital set aside for each issue        of insured bonds consists of insuring bonds together with the        (small) amount of cash equity discussed above (Integrated        Structure approach).

Assume that under each alternative, the capital is funded at a levelsufficient to cover 1.50 times the level of assumed 4-year portfoliodefaults.

(A) First, assume that the actual defaults over a 4 year period equal1.50 times the assumed level.

Under the cash approach, at the end of the 4-year period, all of theinsured defaults have been funded, but none of the original capital isleft. Under the insuring bond approach, (1) all of the insured defaultshave also been funded; (2) the insuring bonds on the issues that neverdefaulted continue to provide capital to meet future needs; and (3) thepreviously defaulted insuring bonds are once again being paid. Theavailable capital continues to be sufficient to cover future defaults inan amount equal to 1.50 times the assumed level. Under the above set ofassumptions, the insuring bond approach provides a superior result.

(B) Second, assume that defaults equal 1.0 times the assumed level.

Under the cash approach, at the end of the 4-year period, all of theinsured defaults have been funded, but the remaining capital equals 0.5times the original assumed defaults—below the coverage level that isextrapolated for a BB monoline insurer. Capital can be increased to 1.25times the assumed defaults to meet the AAA rating requirements. Underthe insuring bond approach the result would be the same as in scenario1(A) except the fewer defaults would have needed be covered.

Note that payments on insuring bonds that are not needed to coverinsured defaults go to the insuring bondholder (i.e., do not remain as apart of the Integrated Structure capital). Accordingly, the fact thatinsuring bond debt service is used to fund defaults has little to noimpact on the future ability of the Integrated Structure to withstanddefaults.

Scenario 2:

Suppose the assumptions are the same as in Scenario 1 (including targetcoverage of 1.50 times), but we examine the impact of the defaults if amonoline insurer's Insured Bond portfolio is secured by a capitalstructure consisting in part of cash equity and in part of insuringbonds. Given the use of loss position and loss category subclasses,regardless of which portion of the portfolio a default occurs in, thecapital used to pay the insured bonds could be derived either from cashcapital or from insuring bonds. However, for simplicity this discussionwill assume that if a default occurs in either the cash or insuring bondportion of the portfolio of insured credits, the capital associated withthat portion of the portfolio is expended prior to using capitalassociated with the other portion.

(A) Assume that the actual defaults are allocated pro-rata between theportion of the Insured Bond portfolio for which the capital is cashcapital and the portion that uses insuring bonds. As in scenario 1, theinsuring bond approach will produce a superior result. In fact, assumethat cash and insuring bond portions are equal and capital equals 1.50times the assumed defaults. If actual defaults over 4 years equal theassumed level, at the end of that period, the remaining cash capitalwould cover 0.5 times the assumed defaults for that portion and theinsuring bond capital would cover 1.50 times the assumed defaults forits portion of the portfolio. The combined capital would still meet theAA monoline rating requirement at 1.0 times the original assumeddefaults and would have to be increased by only 0.25 times assumeddefaults to meet the AAA requirement.

(B) Suppose that the insured bonds are divided equally between cashequity and insuring bond capital. What would the impact be if thedefaults equal the assumed level for the entire portfolio, but they aredisproportionately allocated either to the cash or insuring bondportion? For simplicity and clarity, assume that the combined cash andstructure portfolio is comprised of bond issues for which the assumedannual defaults/capital charge equal 3.25%, such as city GO bonds.

I. If all of the assumed defaults are in the cash portfolio, thedefaults allocated to it equal 2.0 times the level assumed for it,whereas, the cash equity will accommodate defaults equal to 1.5 timesthe assumed level. At the end of 4 years, all of the insured obligationswould have been funded, but all of the cash capital would have beenexpended. The insuring bonds would be sufficient to fund 1.50 times thelevel assumed for the insuring bond portion, assuming all of suchdefaults occur within such portion. To the extent that such defaults arespread across the entire portfolio, a larger amount of defaults could befunded because fewer insuring bonds would be in default.

II. If all of the assumed defaults are in the Integrated Structureportfolio, the defaults allocated to it equal 2.0 times the levelassumed for it under the rating criteria. Accordingly, 6.50% of the bondissues in the Integrated Structure portion of the portfolio would be indefault. The insured bonds in Structure portion of the monoline'sportfolio represent 95.1% of the total of insured and insuring bondsunder the Integrated Structure. The amount of defaulted insured bondsunder the Integrated Structure equals 6.18% of the total insured andinsuring bonds, 95.12% times 6.50%. The non-defaulting insuring bondswould equal 4.56% of the total of insured and insuring bonds, 4.88%times (1 minus 6.50%). The non-defaulting insuring bonds are sufficientto cover 1.40 times the 3.25% defaults assumed under the rating criteriafor the Integrated Structure portion of the portfolio. In addition, thecash equity under the Integrated Structure would be sufficient to cover0.09 times such assumed defaults. The remaining defaults, 0.51 times thelevel assumed, would be covered by the capital allocable to the cashportion of the portfolio. The cash capital would equal 1.50 times theassumed defaults (the assume defaults are the same for each half of theportfolio). So, at the end of the 4 year period, the remaining cashcapital would be sufficient at least to cover 0.99 times the assumeddefaults for each half of the portfolio and the insuring bonds would besufficient to cover 1.50 times such defaults. In aggregate, the monolineinsurer's capital would be sufficient to cover 124.5 times the defaultsassumed for the total portfolio, the average of 0.99 and 1.50 times. Tomeet the AAA requirement, additional cash capital would be needed tofund the 0.5 times coverage shortfall and to replace the cash capitalunder the Integrated Structure. The result produced by the capitalstructure combining cash and insuring bonds is superior to the resultachieved with a cash only approach.

In practice, the targeted coverage level under the Integrated Structuremay be higher. A targeted coverage of 1.75 times, for example, mightused to size the insuring bonds. In the example above, thenon-defaulting insuring bonds would cover 1.63 times the originallyassumed defaults. Only 0.37 times the assumed defaults would be fundedfrom cash capital.

III. Suppose the facts are the same as in scenario II except that (a)the Integrated Structure portion of the combined cash and Structureportfolio exactly equals the amount of the assumed defaults under therating criteria for the combined portfolio and (b) all of the defaultsoccur in the Integrated Structure portfolio. In that case, the assumeddefaults equal 3.25% of the combined portfolio, and the insured bondsunder the Integrated Structure equal 3.25% of the combined portfolio.The cash portion of the insured portfolio equals 96.75% of the combinedportfolio. The cash capital for that portion is sufficient at least tofund a 3.25% annual 4 year default on 96.75% of the portfolio withcoverage of 1.50 times, i.e., sufficient to fund a 4.73% annual defaultof the entire portfolio. Since all of the insuring bonds are in default,the cash capital would be used to fund the defaults. (In this case, thecash capital under the Integrated Structure would not be material, lessthat 1% of the capital under the cash portfolio.) At the end of the 4year period, cash capital remaining would be sufficient to fund a 4 yeardefault equal to 1.47% of the combined insured bond portfolio, whichrepresents 0.45 times coverage of the original assumed defaults. Also,the insuring bonds would no longer be in default and would be sufficientto fund defaults equal to 0.16% (1.50 times 3.25% on 3.25%) of the totalportfolio. Together, the cash capital and insuring bonds would cover adefault of 1.63% of the combined portfolio, representing 0.50 timescoverage of the original assumed defaults. This is the same result as ifthe capital structure for the insured portfolio consisted entirely ofcash. Also, if the coverage of assumed defaults in the cash portfolio isat least 1.3 times, the cash capital will meet the 1.25 times AAA ratingrequirements for the entire portfolio, even if the allocation of assumeddefaults is such that all of the bonds in the Integrated Structureportfolio are assumed to be in default.

The best case is that the rating agencies view that the assumed defaultsas allocable pro rata between the cash and Structure portions ofcombined portfolio from the outset. The worst case should be that theportion of the assumed defaults that are allocable to the IntegratedStructure is determined based on the standards for municipal poolsapplied to State Revolving Funds (“SRFs”), with the remaining amount ofassumed defaults allocated to the cash portion of the portfolio. Underthe SRF standards, all of the insuring bonds might be assumed to defaultuntil the number of bonds issued under the Integrated Structure equalsat least 10. However, this is less onerous than the facts assumed inScenario 2(B)(III) because the Integrated Structure portion of theportfolio will initially be substantially less than the total amount ofassumed defaults. So, the amount by which the targeted coverage for thecash portfolio would need to exceed 1.25 times would be less than the0.05 times indicated in that scenario to meet the AAA requirement inspite of the allocation of assumed defaults. The portion of the assumeddefault allocated to the Integrated Structure portfolio can be reducedover time as the number of credits in the Integrated Structure portfolioincreases. In fact, as the number of credits insured within theIntegrated Structure portfolio increases, the allocation of assumeddefaults between the cash and Structure portfolios should approach prorata.

In any event, the assumed defaults that allocated to the IntegratedStructure portfolio may not exceed the assumed defaults on the entireportfolio for the particular credit type and rating category. If theassumed defaults on the Integrated Structure portfolio equal 20% of thetotal assumed defaults for BBB city GO bonds, then at most 5 times thenormal assumed defaults may be allocated to the Integrated Structure.

Given insuring bonds structured to cover at least equal 1.50 times thenormal assumed defaults, even if the assumed defaults allocated to theIntegrated Structure portion are several times the overall level ofassumed defaults, the non-default insuring bonds will still besufficient to cover more than the minimum 1.25 times of the overalllevel of assumed defaults necessary to support the AAA rating withoutrequiring additional cash capital. For example, in our example above,even if the defaults allocated to the Integrated Structure portion equal5 times the overall level of assumed defaults, the insuring bonds wouldstill be sufficient to meet the 1.25 minimum coverage requirement forthe level of defaults assumed on the entire portfolio. Given a 1.75times target coverage, the allocated defaults could be more than 8.5times the overall assumed level and the non-defaulting insuring bondswould still provide 1.25 times coverage of the overall assumed defaults.In each case, capital allocated to the cash portfolio would be needed tofund a portion of the defaults disproportionately allocated to theIntegrated Structure portfolio. But, non-defaulting insuring bonds wouldmeet capital requirement necessary to support the AAA rating.

Based on the SRF criteria, the assumed defaults allocated to theIntegrated Structure portfolio for a BBB city GO might initially be 40%,12 times the amount of the assumed defaults under the monoline criteriaapplicable to the combined portfolio. One solution would be to rely onthe excess cash capital in the monoline portfolio until the size of theinsuring bond portfolio is large enough to get more moderate allocationof the defaults assumed for the combined portfolio. Another alternativeis to increase the size of the insuring bonds such that even takingaccount of a 40% default in the Integrated Structure portfolio, thenon-defaulting insuring bonds would be sufficient to provide the minimum1.25 times coverage. In our BBB city GO example above, if the insuringbonds were structure to provide 2.25 times coverage of the assumeddefaults, the non-defaulting insuring bonds would meet the 1.25 timescoverage requirement, even given a 40% default. The insuring bonds wouldbe 7.32%, rather than 4.88% of the issue. However, if the IntegratedStructure cash equity is also used, insuring bonds sized to provide 2times coverage of assumed defaults would be sufficient that thenon-defaulting insuring bonds and cash would provide the required 1.25times coverage. Note that the cash equity does not have to be grossed upin order to address a disproportional allocation of defaults to theIntegrated Structure portfolio.

Under the SRF criteria, for a pool of 9 or fewer credits, the assumeddefaults would be 100%. For a pool of 10 to 19 credits, the assumeddefaults for BBB credits (ignoring concentration issues) would be 40%.For a pool of 20 to 49 credits, the assumed defaults (ignoringconcentration issues) for BBB credits would be 25%. For a pool of morethan 50 credits, the assumed defaults (ignoring concentration issues)for BBB credits would be 18%.

In our BBB city GO example above, if the Integrated Structure portfoliois between 20 and 50 credits, the annual defaults allocated to theIntegrated Structure portfolio (absent concentration issues) would be18%, as compared to 3.25% assumed defaults for the portfolio as a whole.Insuring Bonds structured to provide 1.70 times coverage of assumeddefaults would be sufficient that, even given 25% defaults allocated toStructure portfolio, non-defaulting insuring bonds would provide 1.25times coverage of the overall level of assumed defaults. If theIntegrated Structure cash equity were also considered, Insuring Bondsstructured to provide 1.60 times coverage would be sufficient.

It can be expected that concentration issues will be evaluatedseparately based solely on the Integrated Structure portfolio. However,the total amount of assumed defaults should still be limited based onthe aggregate cash and Integrated Structure portfolios.

FIG. 22A shows a process for managing capital structures for the insurerof debt (e.g., bonds). In one embodiment, a computer system can beprogrammed to manage the BECM such that the BECM's differentiatingcapital structure consists of (i) cash capital and (ii) pledged bonds.BECM can meet all traditional requirements for AAA monoline insurersincluding $200 million of hard, startup capital. However, because ofBECM's innovative approach, $200 million of startup capital can be theequivalent of a conventional monoline insurer having more than $1billion of startup capital.

The committed capital can fall into two categories:

-   -   Regulatory Capital which are funds recorded in computer readable        media at least equal to the amount necessary to meet state        regulatory requirements and rating agency requirements—including        amounts necessary to meeting startup requirements for a new AAA        monoline insurer (e.g., $200 million of hard capital); and    -   Infrastructure Capital which are funds recorded in computer        readable media sufficient to pay initial expenses prior to        commencement of operations and during the first 24 months of        operations (e.g., estimated to be $20 million). BECM will also        incorporate additional sources of liquidity (“Additional        Liquidity Instruments”).

Such Additional Liquidity Instruments may include letters of credit,lines of credit and reinsurance contracts secured by the InsuringCertificate Payments, all of which are recorded in computer media.Amounts drawn on Additional Liquidity Instruments will be reimbursedfrom Insuring Certificate Payments over the at least one electronicexchange.

At step 2202, regulatory capital can be allocated. Allocating caninclude allocating the regulatory capital in the computer memory to anamount equal to at least a coverage factor multiplied by an averageannual depression scenario default percentage for the investment.Several alternatives for determining regulatory capital allocation arecan be used, recorded, and modeled in a computer system with respect tothe entity holding the regulatory capital. In one embodiment, theregulatory capital can be deployed for an insurer performing themethodology of the BECM. In one embodiment, a computer system can beprogrammed to manage the BECM such that the BECM can deploy at least thesame level of upfront regulatory capital as a traditional AAA monolineinsurer (i.e., $200 million), while reducing, in one embodiment, amonoline insurer's leverage ratio from 100 to 1 to less than 30 to 1 byintroducing “pledged bonds” into the capital structure. This results ina more robust and resilient credit structure. Of equal importance, BECMcan increase the leverage of cash capital. As tangible result andtransformation, accounts of an insurer using BECM software basedmethods, system, or apparatus may have available additional funds thatare not available to a monoline based method, system, or apparatus.

For example, using a traditional monoline capital structure, $200million of regulatory capital supports approximately $21 billion ofmunicipal bonds. Using BECM's technology, the same $200 million supports$125 billion of municipal bonds. Thus, the invention enables theregulatory capital to support more than 5 to approximately 6 times asmuch of the bonds. The invention can be tailored to enable theregulatory capital to support from 2 to 3 to as much as 10 times theamount of bonds supported by the traditional monoline capital structure.

In one embodiment, the regulatory capital can be held by a SpecialPurpose Company. Earnings on such capital are applied by the SpecialPurpose Company to the ROE (return on equity) on regulatory capital.Regulatory capital is allocated in a computer system to each InsuredBond issue in an amount sufficient, together with the InsuringCertificate Payments and Additional Liquidity Instruments, to maketimely payment of insured defaults under a depression scenario. Bothallocated and unallocated regulatory capital are available in thecomputer system to fund insured defaults. Regulatory capital can also beapplied to reimburse over the at least one electronic exchange anyprovider of liquidity to the extent that reimbursement is not promptlymade from Insuring Certificate Payments. Initially, regulatory capitalwill be allocated in a computer media to each Insured Bond issue in anamount equal to the average annual depression scenario default for thebond issue and credit category. The appropriate amount of regulatorycapital and other liquidity is reviewed on an ongoing basis using userinterface, algorithm determining sufficiency of coverage for depressionscenarios, or the like. To the extent that regulatory capital is useddirectly or indirectly to fund an insured default, such capital will bereplenished from Insuring Certificate Payments using a computerintercept components, such as triggers in a database, stored procedure,electronic determination of a need for replenishment, or the like.

Liquidity contributes to BECM's ability to guaranty the timely paymentof Insured Bonds' principal and interest payments. For this purpose,liquid funds include moneys than can be immediately accessed using acomputer system and over the at least one electronic exchange withoutthe possibility of any material loss.

The first source of liquidity configured in computer memory to be usedfor the guaranty can be the regulatory capital—initially $200 million.As bonds are insured, an amount of regulatory capital equal to 1 timesthat average annual depression scenario assumed default will move fromunallocated and will become allocated in a computer memory (e.g., afield in a database can tag the funds as “allocated”). (By contrast, toprovide 1.5 times coverage of a four year depression scenario default, aconventionally structured monoline would allocate 6 times the averageannual assumed default.) Once the initial regulatory capital is fullyallocated, additional regulatory capital will be raised over the atleast one electronic exchange to grow the insured portfolio.

In yet another embodiment, at step 2202, the capital structure of theBECM Structure can be configured differently from the capital structureof municipal bond insurers. The bond insurer's capital is primarily inthe form of cash funded from equity, with a portion provided throughreinsurance. Presumptively, the reinsurers have a similar need to fundtheir obligations with cash. The capital provided by both the municipalbond insurer and the reinsurer is risk capital funded from equity.

On the other hand, the risk capital in the BECM Structure is provided bythe Insuring Obligations. Unlike the capital provided by bond insurers,which may be sufficient to cover the rating agencies assumed (i.e.,4-year) default scenario, the capital provided by the Insuring Bonds maybe sufficient to fund a default that continues for the life of an issue.(Of course, such a default may be allocated to nonrelated InsuringObligation).

A need for cash capital under the BECM Structure is to provide liquidity(in the event that debt cannot be used) since it can take up to a yearto intercept sufficient payments due on Insuring Obligations to make thepayments due on Insuring Obligations. To provide liquidity, 25% of thecapital normally provided by bond insurers (i.e., enough to cover thefirst year of a 4 year default scenario) should be sufficient. In theSRF context, S&P now assumes a 7 year default in which the amount ofdefaulted bonds ramps up over time. Under that approach, cash capitalequal to 1/16th or 6.25% of the normal bond insurer requirement shouldbe sufficient.

If the payment dates of the underlying bonds are distributed throughoutthe year, the need for liquidity can be significantly reduced if theassumed defaults are assumed to be distributed across the year. Even ifthe defaults are presumed to occur simultaneously, the period duringwhich any loan from cash capital or other sources may remain outstandingcan be reduced.

Accordingly, cash capital under the BECM Structure is more akin to debtor preferred stock than to common equity. Accordingly, the returnrequired on any such capital can be lower. Also, there is a strongargument for allowing a portion of such capital to funded from lettersor lines of credit or for relying, at least in part, on the ability ofthe BECM Structure to borrow.

The exception is upon program termination. Cash capital used as a resultof any default occurring in the last year might be wholly unreimbursed.However, S&P's capital charges (i.e., the risk of default) decline asbonds near maturity. The calculated capital charge for the last year isabout 25% of the initial capital charge. Two years before maturity, thecapital charge is 40% and three years before maturity, the charge is 45%of the initial capital charge. Given the 1.5 times coverage of assumeddefaults, cash capital used to fund a default in the third year prior tofinal maturity may be fully recovered. The only cash capital at risk isthe larger of (i) 50% of the second to last year's cash capitalrequirement and (ii) 100% of the last year's capital requirement.Actually, coverage of assumed defaults will grow dramatically over timeif we do not reduce the amount of Insuring Obligations as the capitalcharge declines. So the amount of clause (i) should be reduced.Calculations indicate that coverage will be well in excess of 2 times sothat only a default in the last year puts cash capital at risk. Thus,the real risk capital should be viewed as 25% of the initial capitalcharge.

To provide a DSRF surety policy for a full year's reserve, a bondinsurer should have to increase its capital requirement by 25% (i.e., beable to withstand a 5-year default rather than a 4-year default).However, the BECM Structure can already withstand a 5-year default bydiverting revenues from the Insuring Obligors for an additional year.Accordingly, no additional cash capital should be required to provide aDSRF surety under the BECM Structure. It should only be necessary toconfirm that under any realistic scenario, any loss can still be imposedon the related Insuring Obligations.

At step 2204, the investment criteria for the capital of the insurer canbe selected. Selecting can include selecting by the computer system aninvestment criteria to invest the regulatory capital to create aninvestment return. Regulatory Capital, whether allocated as bonds areinsured or whether not yet allocated, can be selected to be investedover the at least one electronic exchange in very short terminvestments, including investments providing daily liquidity either ingeneral or in the event of an insured default. The selection can bealgorithmic, based on a decision tree, determined by human assistance,or the like. Using a computer based trading systems such as thosedetermining appropriate securities matching appropriate criteria, theinvestment return that are being targeted over time on RegulatoryCapital is the inflation rate, which can be achieved with investmentsproviding daily liquidity. In the event of an insured default, using theautomatic computer based triggers, regulatory capital will be applied(in the absence of other immediate sources of liquidity) to cure thedefault. Note that given the percentage of Insuring Bonds that BECMincorporates (e.g., 3 times that annual assumed defaults), even in theunlikely event that at any particular time all Regulatory Capital wereallocated (i.e., no unallocated Regulatory Capital), Regulatory Capitalis configured to be expended using the computer system to fund InsuredBond defaults and reimbursed from intercepted Insuring Certificate debtservice up to three times (3) within a single year. Without departingfrom the scope of the invention, the factor can be increased to 4-5times with appropriately sized initial regulatory capital.

At step 2206, additional liquidity sources can be determined. Additionalliquidity equal to 1 times the aggregate average annual assumed defaultfor the Insured Bond portfolio is available over the at least oneelectronic exchange. This liquidity level, together with the allocatedRegulatory Capital, provides access to immediate liquid funds at alltimes equal to half of the defaults assumed to occur over a four yeardepression scenario. Also, unallocated equity is an additional source ofliquidity.

Additional liquidity may come from a variety of sources, including:

-   -   Lines of credit and letters of credit,    -   Reinsurance,    -   Debt financings, including short term, intermediate term, and        long term financings, and    -   Maintaining a minimum balance of unallocated regulatory capital.

At step 2208, the capital structures of the pledged Insuring Bonds canbe determined. The process of determining can include determining by thecomputer system a portion of the capital structure for a pledgedinsuring investment that produces at least a portion of the cash streamand securing a draw on sources of the regulatory capital based on theportion of the cash stream. The capital structure of the pledgedInsuring Bonds, including sizing of the pledged Insuring Bonds,obligations to pay funds from the Insuring Bonds, or the like can berecorded in computer memory and can cause a computer system to configureand use the Insuring Bonds as described herein. In one embodiment, evenif all cash funds (regulatory capital and such additional liquidity)were expended to cure insured defaults, the pledged Insuring Bonds arerequired to be sized such that the cash funds would be covered 1.5 timesby the Insuring Certificate (which provides the pledged Insuring Bondsdebt service) that can be intercepted over the at least one electronicexchange within each year to fund insured defaults. In one embodiment,draws on sources of additional liquidity are secured based on theInsuring Trust's intercepted debt service. In each case, any draws onsuch sources of additional liquidity can be secured based on computerrecorded obligations by the ability of the Insuring Trust to interceptInsuring Certificate debt service in order to reimburse such amounts andinterest thereon. In other words, these draws are secured by AAA qualitycash flows, which will affect both the certainty that such sources offunds will be available (even in times of economic and financial stress)and the cost thereof. This also provides the Company with theflexibility to respond quickly and easily to changing perceptionsregarding the appropriate amount of liquidity. The economics of BECM'sapproach are such that the Company can increase the amount of liquiditywithout any material financial impact. In the case of a debt financing,the debt may also be secured (in the absence of a default) by: (i) theinvested proceeds of the debt financing and (ii) by revenues of theCompany.

At step 2210, the determined capital structures can be applied to aprimary market of debt. The primary market can include newly issueddebt, including newly issued bonds from an issuer. The issuer can bemunicipalities, and the issued debt can be a series of Insured Bonds andInsuring Bonds. The capital structures can be recoded in computer memoryand associated with various primary market debt, characteristics, or thelike. The stored data, assumptions, and associations can be used by thesteps 2010-2022 of FIG. 20 to manage supported debt.

At step 2212, the determined capital structures can be applied to asecondary market. The secondary market can include already issued debt,securities, equity, or any other type of financial instruments. Thecapital structures can be recoded in computer memory and associated withvarious secondary market instruments, characteristics, or the like. Thestored data, assumptions, and associations can be used by the steps2010-2022 of FIG. 20 to manage support of the supported debt,investments, etc. The operations of step 2212 are described in moredetail in conjunction with FIG. 22B. Processing then returns to otherprocessing.

FIG. 22B shows an application of the BECM system to guaranteeopportunities in the secondary market for municipal securities (est.$2.7 trillion). Approximately $1 trillion of the outstanding municipalbonds meet BECM's credit and selection criteria as described herein(e.g., BBB or above). The mechanics of secondary municipal bondguarantees is a well established and accepted practice. While much ofthe description herein is directed to insuring newly issued bonds, theprocess, system, media, and apparatuses described herein can be modifiedsuch that instead of issuing Insuring Bonds for newly issued InsuredBonds, an existing bond pool can be split into a insured and insuringpool. Processing can use the split insured and insuring debt/bonds asdescribed herein to enhance the credit of the insured bonds and/or thecomponents of the BECM.

In one embodiment, writing guarantees on bonds owned by investorsentails the steps shown in FIG. 22B. At step 1, secondary market bondsare identified. For example, the information shown is an identityreceived, selected and/or determined electronically for a market bond.The information includes issuer, CUSIP/State, par, maturity, currentdollar price, coupon/yield, commissions AAA/Trust, issuer underlyingratings, issue insured ratings. At step 2, an AAA guarantee is added.Information electronically selected, determined, and received for addingthe guarantee is shown, including AAA dollar price, AAA yield,Acquisition bonds, Trust bonds percentage (e.g., corresponding to theinsuring debt described herein), AAA bond par, Trust bond par, AAA Bondproceeds, Trust bond proceeds, and total proceeds. At step 3, the bondsare reoffered with an AAA guarantee. Information electronicallyselected, determined, and received for reoffering the bond is shown,including the total proceeds, less acquisition costs, less supplementalcoupon, less commissions, less legal and admin costs, and less capitalmarkets percentage. Also shown are any nets, profits, and/or revenuesproduced form the guarantee that is provided to the company as atangible result and transformation of the components of the BECM.

In one embodiment, the Company may not position bonds but may partnerwith capital markets desks to underwrite secondary market guarantees. Inaddition to the guarantee premium, the components of the BECM (e.g., theCompany) may retain a portion of the profit resulting from the increasedvalue of the security. The Company's capital markets partners may berequired through computer based trigger and rules to retain for theirown account and/or underwrite the Trust Bonds associated with the BECMsecondary guarantee. Capital Market partners may receive a percentage ofthe net transaction revenues after all costs, including: Trust Bondsupplemental coupon, legal, and sales commissions.

Hurdles to implementation of the BECM structure are similar to thosefaced by new bond insurers (I) achieving market acceptance that allowsthe new entry's credit enhancement to produce the same pricing benefitsversus unenhanced bonds as other enhancers, and (II) achieving criticalmass—a diversified portfolio of insured credits.

For bond insurers, market acceptance is gained through general marketingefforts and by insuring credits for which established insurers arecapacity constrained or at reduced returns until the new entry's tradingspreads become competitive.

For bond insurers, the critical mass issue is addressed by pre-fundingthe cash capital required (including, to the extent permitted by therating agencies, secondary sources of cash capital) to insure adiversified portfolio of credits. The actual portfolio is acquired overtime as the insurer's trading spread diminishes and it wins bids toprovide insurance.

With respect to FIG. 22B, marketing and portfolio diversificationissues, as well as program termination and tax issues can be avoided orsimplified by (1) having the Insured Obligations be further insured bymunicipal bond insurance and (2) configuring the credit enhancementprovided by the structure as reinsurance to the municipal bond insurers.Under the second approach, either (I) the bond insurers can provide thecash capital necessary to provide the liquidity necessary for a AAArating or (II) the BECM Structure can provide the capital, in whichevent the bond insurer's capital requirement may be based on an alreadyAAA Insured Obligation.

Given alternative (II), the bond insurers may benefit from the AAAcredit quality of the enhancement and should be able to significantlyreduce or eliminate any capital charge relating to the insured bondsthat benefit from the structure.

If the rating of the Insured Obligations insured by a bond insurer wereinitially below AAA, it may be possible to have all or a portion of theobligations of the bond insurer terminate at some point, e.g., once thebonds within a particular subcategory independently achieve AAA ratings.

This approach may avoid any initial marketing penalty, and any bondsthat also benefited directly from the credit enhancement provided by thestructure should actually achieve better pricing than ordinary insuredbonds.

Tax issues relating to use of payments due to the Insuring Obligationsto pay defaulted amounts on Insuring Obligations may be avoided sincesuch amounts may technically go to reimburse the bond insurer who mayinitially advance the funds to make the Insured Owners whole.

Certain risks, such as validity risk may likely remain with the bondinsurer or simply not be covered risks. There are many variations forintegrating bond insurance into the structure.

For example, rather than having 4 Loss Position Subclasses, the bondsallocable to the third loss and fourth-loss positions can be sold as NonObligations and the bond insurer can cover the risks that may otherwisehave been allocated to those bonds. Also, the third and fourth lossposition subclasses can be insured by the bond insurers.

Alternatively, the structure can be created without cash capital and thecontribution of the insurer can be to provide the necessary cashcapital. As noted below, it may be possible for a bond insurer to use aportion of its existing capital to meet the liquidity requirementassociated with the Structure. To that extent, every additional dollarof income may increase the return on the bond insurer's capital.

Another alternative for implementation of FIG. 22B may be initially toestablish the BECM Structure in the secondary market by enhancingcredits for which bond insurance is not available. In the primarymarket, it might be easiest to establish the BECM Structure inconnection with competitive sales. In that context, it may be clearlydemonstrable that the issuer is achieving savings by using the BECMStructure instead of traditional bond insurance. That should minimizethe pressure to provide extraordinary discounts to issuers to get themto use the Structure. Also, in this context, there may be no tax issuerelating to offering the Insuring Obligations to the public prior tosubjecting the underlying bonds to the obligations imposed by thestructure which are the basis for the additional interest payable onsuch bonds.

The quality of the credit provided by the structure is superior to thatprovided by municipal bond insurance since the ability to divertpayments from the insuring bonds continues beyond the period necessaryto fund the rating agencies assumed 4 year default. In fact, given cashcapital sufficient to fund the first years default, the structure canwithstand a default that lasts to maturity of the defaulting bonds.Since the credit support provided by the 1st loss subclass goes onindefinitely, the risk of an ultimate loss to the 2nd loss and highersubclasses is negligible. So, the risk associated with applyingmunicipal bond insurance to loss subclasses other than the 1st losssubclass associated with a particular bond issue may be non-existent.

FIG. 23 shows a process for determining credit ratings for variouscomponents of the BECM. At step 2302, the capital pre-funding of theinsurer is established by including a capital pre-funding in the capitalstructure. In one embodiment, the capital pre-funding in the capitalstructure is established by a computer system in an amount that is amultiple of an average annual depression scenario default percentagethat is based on the credit rating of the investment.

In another embodiment, the computer system determines an amount of thecapital pre-funding by the insurer that is sufficient to cover a defaultand that is calculated by (a) at least a pre-funding coverage factormultiplied by (b) a downgrade function that is applied to an averageannual depression scenario default percentage for the investment basedon the credit rating of the investment. In one embodiment, the downgradefunction comprises a weighted sum of a percentage of a given insuredinvestment issued by a given issuer that is at a current credit ratingfalling to a lower credit rating multiplied by another defaultpercentage that is associated with the given issuer's industry and thelower credit rating. The establishing can be performed using, forexample, the interfaces of FIGS. 27A to 33F.

In one embodiment, the basis for the capital charges can be the ratingagencies' assessment of the risk of municipal default for each credittype and each rating category during a four year depression scenario.The capital charges represent the anticipated percentage defaults withinthe insurer's portfolio for each such credit type and rating category

Under BECM's method, for the capital structure that is implemented in acomputer system, sufficient capital is pre-funded in computer basedaccounts to withstand rating agency depression scenario defaults andstill retain sufficient capital to meet the Aaa criteria. The amount ofcapital pre-funding and a numeric ratio representing whether the capitalis sufficient to withstand the depression scenario can be provided aselectronic parameters.

In contrast the BECM system and method, to achieve AAA monoline rating,the monoline insurer's capital must cover the aggregate capital charges(i.e., its assumed four year depression scenario defaults) by at least1.25 times. In practice the monoline insurers have been capitalized atslightly higher level, e.g., 1.5 times to 1.6 times. Based on theseparameters, monoline insurers habitually accumulated risk exposure atinsured risk to capital ratios in excess of 100:1.

If insured defaults occur at the assumed depression scenario levels, themonoline insurer's remaining capital is short of the minimum AAA capitalrequirement by 0.65 times to 1 times. The monoline insurer is thenexpected to raise additional capital to maintain its AAA level and topay claims, if needed. Similarly, if the credit quality of the portfoliodeteriorated so as to increase the monoline insurer's capital chargesbeyond its available capital or to decrease the coverage margin below1.25 times, the insurer is also expected to raise additional capital. Infinancial crises, raising capital at a time when the credit markets areunder stress is very difficult and at times impractical.

At step 2306, the capital adequacy of the BECM insurer is examined basedon the period during the depression scenario. During the depressionperiod, if the assumed level of defaults were to occur, BECM cancontinue to meet the Aaa monoline criteria as long as the Insuring Bondsare computed to be sized to equal at least 2.3 times the assumeddepression scenario defaults for the BECM portfolio. The BECM computerbased insuring system can sustain that assumed level of defaults for thelife of the portfolio (e.g., 20 years) without falling below the Aaacapital requirements. A result of this examination can be provided as aelectronic parameter. In general, for steps 2304-2306, the computersystem can examine the capital adequacy of the insurer's capitalstructure to cover a default based on a default scenario that occursduring or at an end of the depression scenario period.

At step 2308, the credit rating of the BECM components are determinedbased on the examinations of capital pre-funding and capital adequacy.The BECM components that can have their credit ratings determinedinclude loss classes, the insurer, and/or the Trust. In one embodiment,determining can include determining the credit rating for the insurerbased on the determined capital pre-funding and the examined capitaladequacy. In one embodiment, the computer system generates determinationof whether the established capital structure is sufficient to cover adepression scenario period to obtain a minimal target credit rating forthe insurer. The steps of examining the capital adequacy and generatingthe determination can be performed using, for example, the interfaces ofFIGS. 27A to 33F.

The electronic parameters can be received from the steps describedabove. Based on the received parameters, a rating function or algorithmmay be used to determine the credit rating of the insurer, the Company,the trust, or other components of the BECM. The rating function can be adetermination of whether the parameters meet certain thresholds, adetermination of whether an average, weighted average or the like of theparameters meets certain thresholds, or the like. The thresholds cancorrespond to the credit ratings, AAA, AA, A, etc. In one embodiment,the thresholds can correspond to adequacies of capital to withstandingdefaults in depression scenarios as described above. Multiples above theadequate capital can correspond to different thresholds such as AAA, AA,A, or the like. As described above, the multiples can be well above 1.5to 2 times. In such cases, the ratings can be determined to be AAA oreven higher, such as a “True AAA”.

Given the quality of the credit enhancement provided by the structure,it may be possible for the structure to borrow (using EMCP or letters orlines of credit, for example) in order to make payments due on a timelybasis and in order to avoid a need to divert funds payable on nonrelatedInsuring Obligations. Such debt may be highly secure since it (and anydebt issued to take it out) can be secured by all of the payments due toInsuring Obligations of all Loss Subclasses.

Given the rating agency assumptions with respect to the period of timethat a municipal borrower may remain in default (generally 4 years if aAAA rating is sought) and the ability to borrow on a temporary basisusing the credit of the structure, the risk that losses will beallocated to nonrelated Insuring Obligations can be minimized by usingdebt to make the Insured Owners whole. Assuming the defaulting borrowerresumes payment as assumed, the cost of the default (interest on anydebt incurred and any unpaid principal) can be allocated the relatedInsuring Obligations. Note that the assumptions regarding the durationof any default are conservative in light of actual experience with thefew municipal defaults that have occurred.

Processing then continues to other steps.

FIG. 24 shows a process for sizing an Insuring Bond. At step 2402, anInsuring Bond's debt service coverage is determined and is configured toachieve the target credit rating such as the credit rating determinedfrom step 2004. For example, in one embodiment, during the depressionperiod, if the assumed level of defaults were to occur, BECM cancontinue to meet the Aaa monoline criteria as long as the InsuringBonds' debt service is computed to be sized to equal at least 2.3 timesthe assumed depression scenario defaults for the BECM portfolio.

In one embodiment, the S&P capital requirement (and presumptively, theothers as well) decreases (in each by 25% of the original requirement)for maturities less than 5, 3, and 1 years—e.g., the capital requirementfor a 1 year maturity is 25% of the requirement for a maturity beyond 5years. As a result, the amount of Insuring Bonds can be decreased ateach of those points with either the released bonds becoming NonObligations or a portion thereof becoming Insured Obligations and thebalance remaining as Insuring Obligations. In either case, the InsuringOwners will realize an increase in the market value of their holdings.However, even though probability of default is lower, it may be best toleave the Insuring Obligation percent unchanged. First, doing so mightreduce the likelihood that a default can be imposed solely on therelated Insuring Obligations. Second, leaving the % unchanged results inincreased coverage of the capital charge (i.e., assumed defaults) overtime. So, the time it may take to reimburse expended capital declines,increasing the likelihood that a bond insurer's existing capital can beused to provide liquidity for the Structure. Also, since coverageexceeds 2 times for a period prior to final maturity, only the lastyear's capital requirement needs to be viewed as risk capital. Theremainder of the Structure's capital is for liquidity and can beborrowed. Substantial coverage also increases the likelihood that debtcan be issued to fund a default.

At step 2404, the ratio of Insuring Bonds to the Insured Bonds can bedetermined. In one embodiment, appropriately sized Insuring Bonds cancover a default equal to the same percentage of the Insured Bonds as theInsuring Bonds represent of the entire portfolio of Insured and InsuringBonds. For example, assume that the Insuring Bonds equal 3% of the totalbonds issued and Insured Bonds equal 97%. If 3% of the portfoliodefaults, the non-defaulting Insuring Bonds equal 97% of 3% of theportfolio and the defaulting Insured Bonds equal 3% of 97% of theportfolio. Accordingly, the debt service on the non-defaulting InsuringBonds is sufficient and can be used to cure over the at least oneelectronic exchange the 3% default of Insured Bonds. This ratio (e.g.,3% to 97%) can be used for various functions, including the function ofmaintaining constant any payment or redemption of the insured orInsuring Bonds.

At step 2406, the criteria for determining whether the insured orInsuring Bond would default (the “default criteria/criterion”) iscalculated. In one embodiment, determining can include determining thedefault criteria/criterion based on the depression scenario, wherein thedefault criteria/criterion comprises a plurality of default percentagesfor a plurality of issuers based on the depression scenario, and whereinan insurance coverage based on a factor of one of the plurality ofdefault percentages is sufficient to achieve the target credit rating.BECM's default criteria/criterion recorded in computer media and used bythe computer system can be based on the Standard & Poor'scriteria/criterion for monoline insurer capital charges (FIG. 26), butany other similar criteria/criterion can be used without departing fromthe scope of the invention. The criteria/criterion assumptions can berecorded in a database structure, file, spreadsheet, or the like. Thecriteria/criterion shown in FIG. 26 outline for each identified bondtype, the capital charge which indicates the percentage of the bonds ofthat credit type that would be assumed to default (“default percentage”)over a four year depression scenario. For example, the capital chargefor an A rated or BBB rated city or county general obligation bond is 7%and 13% respectively. This criteria/criterion may be changed on anperiodic basis or even in real-time, and may be transmitted to theBECM's computer system over a network, or even accessed remotely (e.g.,from S&P's website as a web service) by the BECM's computer system.

At step 2408, a downgrade function is determined for the Insured Bondbased on at least a portion of a plurality of Insured Bonds insured bythe insurer being downgraded to a lower credit rating. In oneembodiment, the portfolio downgrade function for each Insuring Bondmanaged by a BECM Trust is computed, including Insuring Bond associatedwith the recorded default criteria/criterion. The Insuring Bonds arestructured (e.g., sized in a computer readable media and required to beissued at the size) using the average annual assumed default over a fouryear depression scenario, e.g., 1.75% or 3.25% for an A rated or BBBrated city or county GO bond, respectively. BECM in turn computes andrecords the assumption of a downgrade of a portion of the bonds of eachrating category. This computation is shown in FIGS. 29A and 29B.Specifically the downgrade function can be a step wise function such asone that computes the downgrades as 25% of A rated bonds are downgradedto BBB and that 20% of BBB bonds are downgraded to BB, or the like.Other steps of percentages downgrades can also be used. Accordingly, foran A rated credit the baseline assumed default represents 75% times theA rated assumed default percentage (1.75%) plus 25% times the BBB ratedassumed default percentage (3.25%). In turn, BECM's assumed default foran A rated city or county general obligation would be 2.125%.Accordingly, the Insuring Bonds' sizing is structured based on thecomputed downgrade assumed defaults.

At step 2410, the debt service coverage provided by the Insuring Bondfor the Insured Bond can be determined based on the determined ratio ofcoverage, default criteria/criterion and the downgrade function. In oneembodiment, BECM's Insuring Bonds are structured to provide coverage ofthe assumed defaults in excess of what has traditionally been providedby monoline insurers. The downgrade function can be applied to theappropriate default percentage from the default criteria/criterion thatis associated to the Insuring Bond. The result of the function is theInsuring Bond coverage. The Insuring Bond coverage takes into accountthe state of flux regarding rating agency criteria/criterion and theuncertain direction of municipal ratings. The Company's computer systemcan structure coverage at 2.3 times the assumed defaults, but othercoverage percentages can be used without departing from the scope of theinvention. For example, for an A rated city or county general obligationbond, this calculation results in structuring Insuring Bonds to raise4.89% of the issuer's bond proceeds. The computing system can round upthe Insuring Bonds to 5.25%, representing: 2.47 times the Company'sassumed 2.125% default, and 3 times the assumed defaults for an A ratedcity and county general obligation bond under the Standard and Poor'sdefault criteria/criterion as computed in step 2406. Computing thenreturns to other processing.

FIG. 25 shows a process for determining loss category subclasses. Atstep 2502, the loss category subclasses is established. In oneembodiment, establishing comprises establishing a loss category subclassfor the trust certificate. The loss category subclasses can be recordedand managed in a computer system to group the Insuring Bonds so that, inthe event of a default that cannot be funded by intercepting debtservice payable on the related insuring certificates (i.e., thecertificates associated with the Insuring Bonds of the defaultingissuer), the cash flows from non related insuring certificates that areintercepted to cure the default, are determined to be from insuringcertificates related in computer readable media to bonds with similarcharacteristics to the defaulting bond issue. The loss category subclasscan be recorded as a type field in a database for an insuringcertificate. For example, the individual bond types described in“Standard and Poor's Single Risk Categories” can represent loss categorysubclasses, e.g.:

-   -   General Obligation Bonds of City and Counties (category A)    -   Tax Supported Debt—Sales, gas, excise, gas and vehicle        registration—Statewide (category B)    -   Public power agencies and utilities with no special project risk        and little nuclear dependence (category C)    -   Water, sewer, electric, and gas utilities (revenue secured)        (category D)    -   Investor Owned Utilities—Electric distribution system (category        E)

In addition, each of the single risk categories themselves (i.e., credittypes rated 1, 2, and 3, respectively) can be represent in the computerfields as a loss category subclass.

Alternatively, a loss category subclass might be comprised of more thanbond type or single risk category, e.g.:

-   -   Multiple bond types        -   General obligation City and County bonds plus water, sewer,            electric, and gas utilities (revenue secured) (category F)        -   Personal income tax with a population of less than 1 million            plus local sales, gas, excise, gas and vehicle registration            taxes (category G)    -   Multiple risk categories        -   Single risk category 1 (category H)        -   Single risk category 2 plus single risk category 3 (category            I)        -   Insured Bonds issued within a particular state, e.g.,            California (category J)

At step 2504, the type of the loss category subclasses can bedetermined. In one embodiment, there can be at least two variations onthe use of loss categories subclasses in structuring the Insuring Bonds.

1. Loss category subclasses can be used “horizontally” within each lossposition subclass. Under this approach, in the case of a default undercategory B, the loss would be allocated by intercepting debt servicepayable to Insuring Certificates in the following order determined by adatabase trigger, stored procedure, or any other computer implementedalgorithm:

-   -   Related Insuring Bonds    -   1st loss subclass        -   Category B bonds—not rated        -   All other categories of bonds    -   2nd loss subclass—Ba rated        -   Category B bonds        -   All other categories of bonds    -   3rd loss subclass—Baa rated        -   Category B bonds        -   All other categories of bonds    -   4th loss subclass—A rated        -   Category B bonds        -   All other categories of bonds    -   5th loss subclass—AA rated        -   Category B bonds        -   All other categories of bonds

The use of horizontal loss category subclasses does not require anyadditional credit analysis as compared to structuring the Insuring Bondswithout loss category subclasses.

2. Loss category subclasses can also be used “vertically” so that thereare loss position subclasses within each such vertical loss categorysubclass. Under this approach, in the case of a default under categoryH, the loss would be allocated in computer readable media byintercepting debt service payable to Insuring Certificates in thefollowing order:

-   -   Related Insuring Bonds    -   Category H—Single risk category 1        -   i. 1st loss subclass (and horizontally with respect to loss            category subclasses within the 1^(st) loss subclass)        -   ii. 2nd loss subclass (and horizontally with respect to loss            category subclasses within the 2nd loss subclass)        -   iii. 3rd loss subclass (and horizontally with respect to            loss category subclasses within the 3rd loss subclass)        -   iv. 4th loss subclass (and horizontally with respect to loss            category subclasses within the 4th loss subclass)        -   v. 5th loss subclass (and horizontally with respect to loss            category subclasses within the 5th loss subclass)    -   Category I—Single risk categories 2 and 3        -   i. 1st loss subclass (and horizontally with respect to loss            category subclasses within the 1^(st) loss subclass)        -   ii. 2nd loss subclass (and horizontally with respect to loss            category subclasses within the 2nd loss subclass)        -   iii. 3rd loss subclass (and horizontally with respect to            loss category subclasses within the 3rd loss subclass)        -   iv. 4th loss subclass (and horizontally with respect to loss            category subclasses within the 4th loss subclass)        -   v. 5th loss subclass (and horizontally with respect to loss            category subclasses within the 5th loss subclass)

The use of vertical loss category subclasses may include an additionalcredit analysis as compared to structuring the Insuring Bonds withoutloss category subclasses because each vertical loss category subclasscan have sufficient size to support the target ratings of the variousloss position subclasses within each such vertical subclass.

At step 2506, an obligation to intercept payments to insuring bonds tocover defaults of related insured bonds is established. In oneembodiment, Insuring Bonds are deposited at issuance the Insuring Bondsinto a trust (the “Insuring Trust”), using for example, computer basedrecording software, bank account routing, and other mechanism formodifying a computer readable media. The Insuring Trust holds theInsuring Bonds for the benefit of BECM's Insured Bondholders. That isthe legal obligation to the Insured Bondholders can be recorded inmemory and can constrain the operations that can be applied to fundsfrom the Insuring Bonds that relate to the Insured Bondholders, e.g.,the funds cannot be transferred out of an account if the funds areneeded to make the Insured Bondholders whole due to a default and/or thefunds deemed for the Insuring Bondholders are automatically sent to theInsured Bondholder's account based on a computer determination ofdefault by the issuer of the Insured Bonds. These Insured Bonds can beconfigured in a computer readable media to be secured by both the: (i)Insuring Trust and (ii) BECM's cash capital. That is, cash capital inanother account can be transferred to the Insured Bondholders to makethe bondholders whole based on an electronic determination of thedefault by the issuer.

At step 2508, trust certificates are issued for the Insuring Bonds. Inone embodiment, the Insuring Trust purchases the Insuring Bonds from theissuer through at least one electronic exchange and sells a mirror imagetrust certificate (e.g., the Insuring Certificate) for each InsuringBond deposited into the trust through the at least one electronicexchange. For new issues, the (i) deposit of Insuring Bonds into theInsuring Trust and (ii) sale by the Insuring Trust of the InsuringCertificates occurs simultaneously with the issuance of the bonds, usingfor example, electronic triggers in database records to cause suchsimultaneous issuance. The proceeds raised by the sale of the InsuringCertificates can be identical to the proceeds paid to the issuer by theInsuring Trust. Insuring Bonds bear yields over at least one electronicexchange based on the underlying ratings of the issuers' bonds. In theabsence of an insured default determined electronically by a computersystem, payment of principal and interest on each Insuring Bond ispassed through to the owner of the related Insuring Certificate over theat least one electronic exchange.

In one embodiment, Insuring Certificate holders may be provided certainrights and/or obligations and those rights and/or obligations may berecorded in computer media and programmed to cause the computer systemsdescribed herein to perform actions, such as receiving consent fromInsuring Certificate holders (e.g., over a user interface, a network, orthe like). The rights and/or obligations can include receiving thecoupons and/or principal from the Insuring Bond for the InsuringCertificates, and can include additional yields for the added risk ofholding the Insuring Certificates rated at a particular credit rating.Yields of each loss position or category can be incrementally higher asthe position or category class decreases (e.g., yields increase ininverse to position or category). The sum of the additional yields canbe at least the amount of up front fees paid to the Trust over time forthe issuers in aggregate. In one embodiment, the sum can even be greaterby adding an amount received from issuer's fees paid over time. Otherprovisions recorded in computer media requiring consent of affected caninclude:

-   -   Any change in the right of a certificate holder to be paid the        Insuring Certificate Payments specified with respect to such        certificate, excluding any provision relating to intercepting        Insuring Certificate Payments    -   Any change in the order in which or purposes for which Insuring        Certificate Payments are intercepted except as noted below:        -   At the direction of the Company, subclasses of Insuring            Bonds may be created and/or modified in order to group            related credits and risks together so that the Insuring Bond            Payments of Insuring Bonds that are similar to a defaulted            Insured Bond Issue are intercepted before the Insuring Bond            Payments of dissimilar or less similar credits as reasonably            determined by the Company. However, no such change can be            made which results in a reduction of the rating of any            Insuring Bond by any Rating Agency then rating such bond        -   Any amendment to these provisions.

In one embodiment, the Company may exercise the voting rights of allInsured and Insuring Bonds Except as noted above, amendments to theprovisions of the Insuring Trust can be made. In one embodiment, thecomputer may be programmed to require that amendments to rights andobligations do not result in any reduction of the rating of any InsuredBond or Insuring Bond. Computing then returns to other processing.

FIG. 25 may be modified with alternate steps, embodiments, andimplementations as explained below. In one embodiment, at step 2502,credit losses is imposed on those Insuring Owners who specificallypurchased bonds of (or specifically accepted the credit risk relatingto) the defaulting borrower. This is different from simply having adistinct Underlying Rating which reflects the likelihood of payment ofthe Insuring Obligor by the underlying borrower, but does notsubordinate the Insuring Obligor (both to the related Insured Obligationand to the non-related Insuring Obligations) in the event of a defaultby such borrower. Benefits of this approach include reducing the effecton nonrelated Insuring Obligors of the inclusion of weaker creditswithin the pool. It discourages adverse selection by making eachInsuring Owner responsible for the credit that it enables to beenhanced.

At step 2504, with respect to any payment shortfall on an Included Issue(a “Defaulting Issue”), the default may be allocated as follows:

First, to the related Insuring Obligations. So, in the event of apartial or temporary payment default, it may be possible that the entiredefault may be absorbed by the related Insuring Obligations. There maybe subclasses of the related Insuring Obligations that are required toabsorb the dollar amount of losses in a specified order (See “LossPosition Subclasses”, below). So, for example, the first-loss subclassmight be required to assume all losses up to the full amount of thepayments owed to it. Any additional losses may then be allocated to thesecond-loss subclass up to the full amount of the payments owed to it.It may be natural for the loss position subclasses for InsuringObligations related to a particular bond to correspond to the BECMStructure Rating subclasses.

Second, to nonrelated Insuring Obligations. Their may be subclasses ofnonrelated Insuring Obligations that are required to absorb the dollaramount of losses in a specified order (See “Loss Position Subclasses”,above).

By allocating losses first to the related Insuring Obligations, anyactual losses are configured to be allocated to the related InsuringObligations. The nonrelated Insuring Obligations provide marketingenhancement in the same way as bond insurance—bond insurers viewthemselves as not actually taking any credit risk, but only providingmarketing enhancement. The resultant rating of an Insuring Obligationmay be the lower of its Structure Rating and its Underlying Rating.

The bonds underlying the Insuring Obligations might be held within atrust or otherwise pledged or subject to a lien such that even in theevent of a bankruptcy of a borrower, the proceeds of the bankruptcydelivered to the holders of related Insuring Obligations may be used toreimburse any amounts used to pay the Insured Obligations, includingamounts diverted from nonrelated Insuring Obligations. This approach mayachieve a real subordination of the Insuring Obligations, as compared tosubordination at the borrower level that may not survive bankruptcy. Anyrecoveries from a defaulting borrower may be applied first to reimbursenon-related Insuring Obligations and second to reimburse relatedInsuring Obligations. Also, any loss position subclasses may bereimbursed in inverse order of their loss position. So, within eachcategory of Insuring Obligations, the second-loss subclass may bereimbursed prior to the first-loss subclass.

At step 2508, ratings subclasses can be used to ensure that InsuringObligations not exposed to a default by a nonrelated borrower that islower rated than such Insuring Obligation unless the credit enhancementprovided by a subclass of Insuring Obligations that is not lower ratedis insufficient to cure such default. This might be accomplished, first,by allocating the cost of any loss to be allocated to nonrelatedInsuring Obligations only to Insuring Obligations with the same or alower rating as the defaulting issue. Second, the credit enhancementprovided the Insuring Obligations in each Rating Subclass may have atleast to equal the next highest rating category.

For example, the BBB Rating Subclass of Insuring Obligations shouldachieve at least an A rating when viewed only with respect to thesubclass of BBB-rated Insured Obligations. Similarly, the BBB and ARating Subclasses of Insuring Obligations should collectively achieve atleast a AA rating when viewed solely with respect to the subclass of BBBand A-rated Insured Obligations. Or, alternatively, the A RatingSubclass can be structured separately to achieve a AA rating when viewedsolely with respect to the subclass of A-rated Insured Obligations.

In some cases, additional cash capital may be necessary for a particularRating Subclass to achieve its target rating—i.e., the immediatelyhigher rating category.

So, even on a weak link basis, the Insuring Obligations within aparticular Rating Subclass may achieve the same rating category as therelated underlying bonds. This ignores the potential credit impact ofthe greater severity of a loss on the Insuring Obligations, since thefull impact of the loss may be imposed on the Insuring Obligationsrelated to a Defaulting Issue. Hence, a partial loss on the DefaultingIssue can be a complete loss on the related Insuring Bonds. However,this may not be qualitatively different from the impact of normalsubordination as long as losses are imposed solely on related InsuringObligations.

In order to address the fact that ratings of underlying bonds willchange from time to time, the Rating Subclass of a particular InsuringObligation can change with the rating of the underlying bond. If forexample the City of New York general obligation bond rating is changedfrom A to AA, the Insuring Obligations related to all New York generalobligation bond issues within the structure may move from the A-ratedRating Subclass to the AA-rated Rating Subclass. In one embodiment, thisrating volatility can be avoided by a Structure Enhanced Ratings.

The Structured Enhanced Ratings can be implemented usingcomputer-implemented mechanisms for determined and storing the ratings.A mechanism for split rating is implemented. In order to achieve theobjective of not adversely affecting the ratings of the InsuringObligations with in a rating subclass, it may probably be necessary touse the lowest rating to determine the rating subclass. Fewer ratings(i.e., Moody's and S&P) may seem to be better to minimize thepossibility of split ratings. The impact of split ratings might beminimized if the higher rating were to determine the Rating Subclass ofthe Insuring Obligations for purposes of allocating non-related lossesto the split-rated Insuring Obligations (the BECM Structure Rating maybe the higher of the split ratings) and the lower Rating Subclass wereto determine the Rating Subclass of the Insured Obligations to determinethe allocation of a loss if the split-rated borrower should default. Inone embodiment, non-related losses are allocated first to the lowerrating subclasses (rather than to all subclasses at the same or lowerrating level than the defaulting credit).

As described above the processes of FIGS. 12A to 12E and 14A to 25 aredirected to insuring newly issued debt or bonds, or even to insuringand/or to re-insure already existing bonds or debts. In general, in oneembodiment, without departing form the scope of the invention, the BECMcan use in the place of the Insuring Bond or debt in the above processesany stream of income and need not be income from a bond or debt. Suchstreams can be tied to or otherwise associated with the Insured Bond(e.g., be paid by the issuer of the Insured Bond). The streams caninclude debt, dividends, accounts receivables, or the like.

In one embodiment, the debt managed by the processes described hereincan be a variable rate bond. A structure for variable rate bonds includebeing able to issue the Insuring Obligations for variable rate bondsthat are Insured Obligations as unenhanced, with an interest rate equalto the rate on the Insured Obligations plus the insured/uninsured spreadplus the spread over uninsured bonds allocated to Insuring Obligations.Such high yield variable rate bonds may be candidates for tender optionprograms and may not expose the principal in the program to interestrate risk. Assuming a single class of Insuring Obligations, the spreadsto uninsured might range from 85 basis points to more than 150 basispoints. Alternatively, another structure for variable rate bonds includeissuers simply selling the Insuring Obligations as fixed rate bonds,thus preserving variable rate debt capacity for the Insured Obligationportion of future issues. Another structure for variable rate bondsinclude a mechanism where variable rate bonds might tend to be used bylarger, more creditworthy borrowers so the real risk of default may beextraordinarily low.

FIG. 26 shows an example of a data model for determining a percentage ofpossible defaults (“default criteria/criterion”) over a 4 yeardepression scenario for a type of debt with a particular credit ratingor for a single-risk category. For example, States that are rated CCCare modeled to have a 30% chance of defaulting within a 4 year period.An average annualized percentage of possible default can be determinedby dividing the 4 year period percentage by 4. For example, States withCCC rating has an average annualized percentage of default of30%/4=7.5%.

FIGS. 27A to 33F shows user interfaces and algorithmic models formanaging insurance of debt that is implemented in computer readable andexecutable instructions for managing BECM based components. In oneembodiment, the user interfaces can be a web interface, graphical userinterface, database program, Excel files and associated formulasexecuted by a computer to provide an Excel user interface. In oneembodiment, the interfaces and algorithmic models can be used by thesystems, processes, media, and apparatuses of FIGS. 1 to 26.

In one embodiment, the user interface component which can include any ofthe screens, data-model and algorithms of FIGS. 27A to 33F can beconfigured for receiving input relating to the insured bond and theinsuring bond to generate a model of applying the insuring bonds toenhance the insured bond's credit rating; providing a break-evencomparison of applying established capital structure to a monolineinsurance of the insured bond; generating an indication of thedetermination of whether the established capital structure is sufficientto cover the depression scenario period to obtain the minimal targetcredit rating for the insurer; and sending a message to another computersystem (e.g., the company computer system) to establish an appropriatecapital structure that was modeled using the user interface and based onthe indication.

As shown, the Company, issuers (e.g., municipalities), and ratingagencies are provided the analytical computer based tool and userinterfaces shown to do a model, analyze, and confirm the numericalperformance of insuring debt based on the BECM and to compare the BECMagainst other models. For example, a breakeven analysis can be provided,thus showing municipalities the savings benefit of using the BECM versusthe Monoline. For example, the municipalities can be shown that savingscan come from a higher rating of AAA on their Insured Bonds, thuslowering the cost of borrowing. Users can enter underlying assumptionsand parameters in the user interfaces.

As described and shown in the FIGS. 27A to 33F provides modeling,analysis and interfaces for managing loss position classes, among otherthings. The term “lower loss position” or “LLP” and “higher lossposition” or “HLP” used in the description herein for these FIGS and inthe terms FIGS corresponds to the loss position subclasses describedabove but uses different terminology. The junior lower loss position andsenior loss position correspond to the 1^(st) and 2^(nd) losssubclasses, respectively described above with respect to FIGS. 12A to25. The higher loss position classes 2^(nd), 3^(rd), and 4^(th)corresponds to the 3^(th), 4^(th), and 5^(th) loss subclasses,respectively described above with respect to FIGS. 12A to 25.

As a summary of the computations performed from the various interfaces,parameters are entered into the interfaces of FIGS. 27A to 28D. Based onthe parameters, and the loss position information and downgradefunctions of FIGS. 29A and 29B, a percentage of the insuring bonds tothe insuring bonds is determined. An additional yield for the portion ofthe insuring bonds is used to adjust the coupons of the insuring bondsbased on maintaining level debt service and pricing, as shown in FIGS.30A to 31I. The portion of the coupons of the insuring bonds (includingthe adjustment to the coupon) is used to pay fees, etc. The remainingportion is used to pay the coupons to the holder of the loss positions,including the adjusted coupons associated with each loss position. Thedebt service is maintained level for the loss positions while varyingthe coupons and/or additional yields that are different to each losspositions, as shown in FIGS. 32A to 32F. Based on the pledge of the debtservice for each loss position (that is computed and maintained level)to enhance the insured bonds and/or a higher loss position insuringbonds, a credit rating for each loss position and an enhanced creditrating of the insured bonds are computed in FIGS. 33A to 33F.

Referring to FIG. 27A, information about the BECM system can be enteredand modeled, including entering and modeling the underlying InsuredBond's rating, and other options such as whether the model should alsoenhance the loss classes, the bond's characteristics, current spreadassumptions, premium parameters, and the like. FIG. 27A shows entry ofthe assumed target insured bond (e.g., BBB-rated hospital system),whether the insured bonds are only enhanced or whether the loss classesare also enhanced, bond term, target bond proceeds, insuring bond par,and call provisions. Given the entered assumed information, the percentof Insuring Bonds needed to give the Insured Bond a AAA rating isreturned and displayed, the coverage of Insured Bond debt service, andthe target and actual 4-year default tolerance are displayed. Based onthese parameters entered or shown, various data interfaces can beprovided that shows possible results of using a BECM model versus amonoline model, as shown in FIG. 27A itself and FIGS. 27B to 27H. In oneembodiment, entering data into the interfaces of FIG. 27A, causes anautomatic change in the interfaces of FIGS. 27A to 27H. Of note, the %of Market Spreads as a of particular date to MMD used in the analysis isshown, thus showing the benefit to the purchasers of insuring bonds andassociated trust certificates above other types of similar debtinstruments.

FIGS. 27B to 27C show user interfaces displaying and modelingcomputations and parameters for BECM components assuming yields tomaturity for the insured and Insuring Bonds. The statistics showcomparisons between uninsured bonds, monoline Insured Bonds, totalstructures of bonds, insured and Insuring Bonds using the BECMmethodology, the total structures of the BECM components, and investmentgrade insuring subclasses. As shown, yields information, includingyields with and without an additional coupon or annual charges, yieldswith certain portions, etc. are determined for different bond scenarios(e.g., with and without BECM). Yields benefits are also shown. The costsof the different bond scenarios are also shown. As shown, the yields andother parameters are at least comparable and superior to those providedby monoline insured bonds and/or uninsured bonds.

FIGS. 27D to 27E show user interfaces displaying and modelingcomputations and parameters for BECM components assuming yields to callfor the insured and Insuring Bonds. The types of information issubstantially similar to the user interfaces of FIGS. 27B to 27C, exceptthat the insurer realizes a significant savings in terms of cost ofinsurance by redeeming the bonds early using the BECM model.

FIG. 27F show user interfaces displaying and modeling computations for asummary of yields provided by using the BECM system given the parameterscomputed and entered from FIGS. 27A to 27E. As shown, various yields ofmonoline versus the BECM are shown. The yields show yields frompremiums, for various subclasses, yields retained by the Company/Trust(e.g., the Program), annual yields, net yields, return on equity, or thelike.

FIG. 27G shows a user interface displaying and modeling computations fora summary of premiums and costs of applying the BECM system. As shown,the net upfront structured premium, premiums on structured insuring andinsured bonds, total upfront premiums, total cost of structuring, annualcost of structure, percent of and annual cost of insuring bonds, upfrontcost of the structuring, upfront cost of insuring bonds, cost ofinsuring bonds as a percent of structured cost, any additional yields onequity and profits, percent of total costs of structure available,upfront monetary equivalent to the percent available, max upfront costnet of program costs and annual dollar equivalents to the percentavailable.

FIG. 27H shows a user interface displaying and modeling computations fora summary of different loss classes/positions, including eachclass/position's as a percent of the bond issue and as a cumulativepercent of the insuring bond.

FIGS. 28A to 28I show other user interfaces displaying and modelingcomputations for a summary of using the BECM system. FIG. 28A shows theinsuring bond sizing and associated subclass sizing, using thecomputations and downgrade functions of the processes described herein,including the processes of FIGS. 20, 24, and 25. FIG. 28A shows entry ofthe assumed target insured bond (e.g., BBB-rated hospital system). FIG.28A provides different assumed annual default percentages, coverage toenhance a security to AAA, suggested insuring bond sizes, actualinsuring bond size, and other assumptions and calculations. Alsoprovided are different sizing of different loss subclasses, including aminimum percentage insuring bonds, estimated, proposed, and actualsubclass sizing, and the like.

FIG. 28B shows another user interface displaying and modelingcomputations for breakeven analysis with respect to the BECM and themonoline systems. The managed and displayed monoline informationincludes: benefits of the monoline insurance, breakeven calculations ofthe monoline versus uninsured bonds, premiums information, and the like.As a comparison, cost and benefit information for using the BECM systemis provided, including total cost of the structure, annual costs, annualexpenses, upfront costs, amounts available (e.g., profits), etc. Alsoshown are input assumptions such as target of additional return onstructured equity, base investment return on cash equity, otherinvestment returns, discount rates to determine present values, percentof premiums allocated to expenses, or the like. Also shown are marginsover required coverage of assumed defaults by insuring subclasses, andother insuring bond sizing information.

FIG. 28C shows another user interface displaying and modelingcomputations for structured spreads to unenhanced yields, and structuredspreads to monolines insured for various ratings. As shown, variousassumptions can be entered and modeled, including the percent of currentmarket spreads (based on for example, municipal market data) that isbeing used in the calculations described herein, cash equity as apercent of insuring bond debt service, various loss position yields, andthe like. Also provided are different basis points for spreads forvarious rated structures of insuring bonds (loss positions/classes) overa simple uninsured target bond (e.g., BBB-rated hospital systems).Moreover, also provided are structured spreads for various insured andinsuring bonds compared to monoline spreads for various target ratings.

FIG. 28D shows another user interface displaying and modelingcomputations for yields for various loss positions insuring bondsincluding on senior and junior lower loss positions insuring bonds. Foreach loss position subclass, the yields, spread to an unenhancedcomparable security, an increment between each loss position of thespreads, various tax information, and other information are provided.Also provided are revenues percentages that are available to cure aninsured default from various sources including net program revenuesafter all outflows, additional equity return, and other reservedamounts. Moreover, also provided are downgrade analysis of the targetinsured bond, and the various insuring bonds for different lossclasses/positions. Information provided for each bonds include the grossrequired coverage of assumed defaults, required coverage for the initialrating, percent of minimum capital for the rating category, percent oforiginal capital supporting the structured rating, original excesscapital, requirements for downgrade analysis, minimum capital requiredassuming downgrade, increase in minimum capital required for downgrade,percent of subclass that can be downgraded without causing a downgradeof the target insured bond, percent of respective bond that can defaultwithout causing a default on payments of the insured bond debt, orcausing a downgrade of the insured debt, or the like.

FIGS. 28E to 28I show other user interfaces for providing various inputsand calculating and providing parameters for the BECM system. FIG. 28Eshows an input and analysis for general inputs for the target insuredbond, including various attributes of the bonds such as total amount ofthe issued bonds, whether there is principal amortization, variousassociated dates, including maturity dates, call dates, amortizationperiods, cost of issuance and additional underwriter's discount forinsuring bonds, and the like.

FIG. 28F shows specific inputs and analysis for the structured bondsincluding the credit type and underlying bond ratings for the targetinsured bonds, and various spreads comparing enhancement of the creditof the insured bonds under various methodologies to uninsured bonds,insured bond percentages and insuring bond percentages under the BECM(which may be calculated based on the processes of FIGS. 21 to 22A).Various information about the loss position subclasses are also managedincluding the number of insuring subclasses, the maximum additionalyields on the lower loss position bonds, the lower loss position seniorand junior bonds percentage and coupon limit for the senior and juniorlower loss position bonds, the percentage of the insuring bond losspositions breakdown for loss positions of various credit ratings. Alsoshown are premiums, coverage and tolerance information under the BECMmethodology, including the minimum required coverage of the assumeddefaults for insuring and insured bonds of various ratings, varioustolerances, including an average annual weighted default tolerance,average worst case assumed annual defaults, structured upfront premiumsand annualized premiums. Parameters for comparison against monoline anduninsured are also included such as the target for additional structurebenefit to issuer versus benefit of monoline insurance, actual benefitto issuer versus monoline, and total structure benefit versus uninsured.Also shown is the amount of money retained for the annual programrevenues, liquidity fees, return on equity, etc., for applying the BECM,and the lower loss position tranches of insuring bonds in percentages.

FIG. 28G shows specific inputs and analysis for the marketing penaltiesfor using the BECM, including for issuing trust certificates and bondinsurance inputs. Shown are the higher loss positions insuring bondpenalty for the structure, any taxes, and additional penalties. Shownalso are the bond insurance inputs, including information for theunderlying bonds. The information includes whether the bond is callable,and whether the issuer has access to a monoline insurer. Also shown is abreakeven analysis compared to monolines including information aboutmonoline bond insurance premiums as percent of total debt service and asa percent of the breakeven premium, monoline costs, benefits, andbreakeven versus uninsured, etc. The algorithm for the analysis does thefollowing: calculate breakeven monoline premium by doing a sizing withan estimated premium greater than zero. Even if insurance is notavailable for underlying bonds, since insurance is used to calculate thepremium for the HLP Bonds, show insurance as available with a premiumequal to the breakeven premium.

FIG. 28H shows specific inputs and analysis for the structured insuredbonds, and the insuring bonds. To reflect the availability of monolineinsurance for Structure Insured, the algorithm for the analysis does thefollowing: First, do a bond sizing with no insurance available. Second,paste the value of the insurance benefit and equivalent upfront premiuminto the cells to the right. Third, do another bond sizing withinsurance available. The breakeven comparison information includeswhether the AAA monoline is available for this type of bond, net pricingbenefit of the monoline bond insurance on the structured insured bonds,estimate of upfront premium equivalent to net benefit, percentage ofmonoline insurance benefit paid to bond insurer, annualized upfrontpremium for structured insured bonds net basis points available forinsuring bonds and program, and upfront monoline insurance premiums.

Also shown are similar breakeven analysis for the insuring bonds. Thebreakeven comparison information includes whether the AAA monoline isavailable for this type of bond, benefit of bond insurance on the higherloss position bonds comparisons, monoline insurance premium comparisons,percentage of monoline insurance benefit paid to bond insurer,annualized monoline premiums for higher loss position bonds, upfrontmonoline insurance premiums, benefits of bond insurance on the higherloss positions bond net bond insurance premiums and credit spreads.

FIG. 28I shows specific inputs and analysis for rounding inputs andconventions for performing calculations shown in the various interfaces.Liquidity and equity inputs are also provided, including liquidity as apercent of insuring bond debt service and as a percent of total insuredand insuring bond debt service, liquidity in dollars plus fees, equityas a percent of insuring bond debt service and as a percent of 4 yearassumed default covered by structure cash equity, equity in dollars plusreturn on equity above investment return, and investment return on cashequity and upfront premiums. Also provided is a comparison of the BECMstructure to the monoline insurance and conventional CDOs, includinginformation about a portion of the monoline premium allocated to hardprogram expenses, monoline cash equity capital amount plus unratedinsuring bonds earnings on equity-like return, and the marketing penaltyon insured CDOs plus tax on reallocated interests in basis points on allbonds.

FIGS. 29A and 29B show an example of a method, data model, and interfacefor computing a downgrade function, and sizing the Insuring Bond andloss class and/or category subclasses. The method, data model, andinterface takes into account of assumed defaults, assumed portfoliodeterioration downgrades, and coverage. In this example, the analysisassumes that startup cash equity is $200 million for both the BECM and aconventionally structured monoline insurer and that both capitalallocated to an insured issue and capital not yet allocated areavailable to cure a defaults. For each bond with an underlyingparticular credit rating, a downgrade function or relation is providedto determine the percentage of the bond that will deteriorate to a lowercredit rating. For example, for the A rated bond, 75% will remain A,while 25% will fall to BBB. The function may be over the lifetime of thebond or over a 4 year period. Also shown is the assumed default for eachbond type over the 4 year or 1 year period. The percentage that degradescan be multiplied to the average annualized depression scenario coveragepercentage (from FIG. 26) for the associated debt/bond type (e.g., GO).This weighted sum can be used as the coverage percentage for aparticular debt/bond. As shown, the BECM has significantly greatercapital (i.e., capacity to withstand defaults) at every point in timefrom the issuance of the first Insured Bond until the monoline insurer'sstartup capital is fully allocated. The bond portfolio can comprise Aand Baa rated City GOs. The monoline insurer's capital is fullyallocated when $19.6 billion of bonds have been insured whereas the cashequity available under the BECM can support the enhancement of $136billion. The BECM's default tolerance significantly exceeds that of theconventional monoline at every point in time both over a four-yeardepression scenario and over the term of the bonds (e.g., 20 years).

FIGS. 30A to 30C show examples of a method, data model, and interfacesfor providing calculations of sizing of structured insured and insuringbonds. FIG. 30A shows that the structured insured bonds is determined tobe 75.5% of the issued bonds for the particular type of target bond(e.g., BBB-rated hospital system). The various information about thedebt service, including the level of debt service, proceeds information,bond par, surplus versus target, the yields of the insured bonds (baseand all-in), and the like. Shown for each payment date (on a semi-annualbasis) for the insured bonds, are the various structured insured bondsizing and the present value of the debt service for the base yield andthe all-in yield (column CC-CD). Base yield includes the yield at whichthe gross proceeds of an issue are borrowed. All-in yield includes thebase yield plus the annualized cost of any upfront monoline insurancepremium or upfront structure premium. For each payment date, the sizinginformation includes preliminary bond proceeds (BT), bond par (BU) andmaturity interest (BV), and final bond proceeds (BW), bond par (BX),maturity interest (BY), semi-annual debt service (BZ). Also shown areannual debt service (CA), and any bond takedowns (CB).

FIG. 30B show examples of a method, data model, and interfaces forproviding various data parameters for the insured bond, includingstructured insured costs versus monoline insured, structured insuredbenefits versus uninsured bonds, and an analysis of the economics basedon the base yields of the structured insured versus an uninsured bond.The analysis includes a base yield benefit of the structured insuredversus insured in basis points, less annualized bond insurance premium,less annualized upfront structure premium, less benefit of monoline bondinsurance retained by issuer, less additional benefit to the issuerprovided by the structure, plus gross benefits of certain insuring bondsversus uninsured, less a premium for monoline insurance of on thecertain insuring bonds, less interest on those certain insuring bonds.The net of the foregoing numbers provides the net benefit for thestructured insuring bonds that are available for insuring the insuredbonds. This number can also be provided in basis points on the insuringbonds as the net benefit available for the insuring bond.

FIG. 30C shows an example of a method, data model, and interfaces forproviding the pricing structure of the insuring bonds before additionalinterest. As shown, the insuring bonds is computed to be 24.4% of theissued bonds. For each payment date, information shown for the insuringbonds (column CG-CQ) is substantially the same as for the insured bond,except that aggregate base yield information is also provided. Thepresent value of the debt service for the aggregate base yield (CR) isalso provided over the period of years for the payment dates (on asemi-annual basis) of the insuring bonds. The computations andinterfaces of FIGS. 30A-30C are configured to be used by the issuer todetermine the proceeds, par, maturity, etc. that the issuer is obligatedto pay for the insured and insuring bonds.

FIGS. 31A to 31F show examples of a method, data model, and interfacesfor providing calculations of coupons, proceeds, and yields paid by anissuer for insuring bonds. FIG. 31A shows an a model and interface forcomputing the adjusted structured insuring bonds to maintain a levelpricing to the issuer. The computation provides an adjusted coupon thattakes into account the incremental yield provided to the insuring bondto keep the proceeds or price of the bond level, thereby to provide alevel debt service. The higher yield is paid to compensate the holdersof the insuring bonds for the extra risk of coupons form the insuringbonds will be intercepted. The extra coupon is structured as a debtservice obligation and not a fee to make the payment more secure for theholder of the insuring bonds and the trust certificates. As shown, foreach payment date (on a semi-annual basis) for the insuring bonds, theinterface provides the priced to call or maturity selection (column CS),the original yields to maturity (CT), the original yields to call (CU),the insuring bond price (CV), the adjusted yields to worst (CW),estimated adjusted price to worst (CX), initial versus adjusted price toworst (CY), the estimated adjusted maturity coupon (CZ), incrementalmaturity coupon (DA), adjusted yields to best (DB), adjusted price toworst (DC), and the adjusted bond proceeds (DD). As can be seen, thebond pricing remains level on a semi-annual basis. Taking into accountthe adjusted yields, an incremental coupon is computed using variousmethodologies including search, estimation, iterative computation, orthe like. In one embodiment, the coupon is computed using the Excelfunction GOALSEEK. The adjusted bond proceeds can be computed based onthe adjusted coupon. The information provided by FIG. 31A can bedisplayed in FIG. 30C, including providing the level debt service forthe insuring bond. Additionally, the adjusted bond proceeds of FIG. 31Acan be provided to the interface of FIG. 30C for example in the Finalbond proceeds column.

FIG. 31B shows an example of a method, data model, and interfaces forproviding another computation of adjusted structured debt servicereflecting issuer level pricing. The information of FIG. 31B includeparameters such as total structured bond par, bond proceeds, up frontand insured premiums, underwriter's discount, cost of issuance, netproceeds, bond yields ad proceeds for base yields and all-in yields, andvarious other information. Shown for each payment date for the adjustedinsuring debt service, are insuring bond par (column DE), interestcoupons (DF), maturity interest (DG), adjust semi-annual debt service(DH), annual insuring debt service (DI), present values of debt servicefor different types of yields (DJ-DK, DN-DO), total semi-annualstructured debt service (DL), and an annual structured debt service(DM—the sum of most recent two semi-annual structure debt service).Similar to FIG. 31A, for the adjusted insuring debt service, theinterest coupons is computed based on an iterative computation that isbased on keeping the pricing for the bond level, while increasing theyield.

FIG. 31C shows an example of a method, data model, and interfaces forproviding another computation of adjusted structured debt service forhigher level loss positions reflecting issuer level pricing. Similar tothe computations above, the coupon is adjusted to take into account ahigher yield while keeping the price level. Shown for each payment date,are original yields to maturity (column DQ), original yields to call(DR), original insuring bond price (DS), adjusted yields to worst (DT),estimated adjusted prices to worst (DU—which is maintained level),initial versus estimated adjusted price to worst (DV), estimatedadjusted maturity coupon (DW—which is computed based on the levelpricing and extra yield), additional maturity coupon (DX), adjustedyield to best (DY), adjusted prices to worst (DZ), and adjusted bondproceeds (EA).

FIG. 31D shows an example of a method, data model, and interfaces forproviding an analysis of the economics of insuring bond subclassestaking into account level debt service. An increment to the uninsuredyield available to the insuring bond is provided. The higher lossposition subclass economics is also provided, including marketingpenalty due to the structure of the higher loss position bonds (e.g.,trust certificate marketing), certain portions, credit spreads, totalyields, adjustments to yields, and increment to coupon (as described inFIG. 31C). The lower loss position subclass economics can be determinedfrom the above information and other information, including theincremental yield (above uninsured yield and the portion of themarketing penalty on the higher loss position insuring tranches), bondproceeds retained for annual program revenues, liquidity fees, andreturn on equity. The sum of the incremental yield and bond proceedretained, etc., is equal to the yields available for lowest positionbonds, above the uninsured bond yield and the portion of the marketingpenalty and net program revenues, fees, etc. This number in basis pointscan be converted to the yields in basis points on the lower lossposition bonds.

FIG. 31E shows an example of a method, data model, and interfaces forcomputing yields, coupons, and level debt service for a plurality ofloss positions. The interface provides for each payment date, theadjusted coupons on the insuring coupon (column ED—as computed by theinterfaces of the FIGS. 31A to 31B. above), the coupons adjusted onlyfor the highest loss position's marketing penalty (EE), fees (EF), netadditional coupons on the insuring bonds (EG), the equivalent additionalcoupons on the lower loss positions (EH—as computed in FIG. 31C),additional lower loss position supplemental coupon after any couponlimit (EI), the total coupon on the lowest subclass (EJ), the yield tomaturity of the lowest subclass (EK), the additional lower loss positionsubclass yield to maturity (EL), yield to call on the lowest subclass(EM), additional lower loss position subclass yield to call (EN), andthe additional lower loss position subclass yield to worst (EO). Asshown, the predicted average and weighted averages of various columnsare also shown.

FIG. 31F shows an example of a method, data model, and interfaces forcomputing a verification, data, and computation check of thecalculations of FIGS. 31A to 31E. As shown, for each payment date, theinterface provides the par of the highest loss position insuring bonds(column EP), interest to maturity on the highest loss position insuringbonds (EQ), debt service on higher loss position insuring bonds (ER),par of lower loss position insuring bonds (ES), interest to maturity onthe lower loss position insuring bonds (ET), debt service on the lowerloss position insuring bonds (EU), total par of the insuring bonds (EV),the total debt service on the various insuring bonds subclasses (EW—sumof the previous mentioned debt services), surplus interest due to couponlimit on lower loss position bonds or no loss position bonds (EX), bondproceeds for annual program revenue, fees, and return on equity (EY),total debt service on the insuring bonds before subdivision into varioussubclasses (EZ), and the surplus debt service on insuring bonds fromtruncating the highest loss position subclass yields (FA). Theverification check should show that the sum of column EW (total DS ofvarious insuring subclasses) and EX (various surpluses) and EY (bondproceeds for fees) should be near or equal to EZ (total debt service ofinsuring bonds) plus FA (a miscellaneous surplus DS of insuring bondsdue to truncating of various values).

FIGS. 31G to 31H show an example of a method, data model, and interfacesfor computing a summary of the bond yields and the yield relatedcalculations as computed from the above FIGS. Shown are, for a baseyield and an all-in yield, bond yields on insuring bonds, variousparameters and calculations for bond yields paid by the issuer, variousparameters and calculations for bond yields on insuring bonds as furtheradjusted within the structure, with various parameters and calculationsfor comparisons to the monoline alternatives. The comparison of theinsured and insuring bonds to the monoline insured system includes datafor costs, yield comparisons to uninsured bonds, upfront premiums, orthe like. A comparison between the monoline and the aggregate structureof the insured and insuring bonds are also provided, including aggregatebenefits versus uninsured, incremental costs, and the like.

FIG. 31I shows an example of a method, data model, and interfaces forcomputing a summary of the components of adjusted insuring debt service.The summary information includes the total program revenues (e.g., tothe Trust of Company). Shown for each payment date are additional debtservice on insuring bonds (column FX), marketing penalty on the highestloss insuring maturities (FY-FZ), additional yields on the lower lossposition maturities (FZ), additional yield on lower loss position bonds(GA-GB), liquidity and equity expenses (GC), annual program revenues(GD), surplus interest from coupon limits or truncating (GE) and thetotal amount paid to the insuring bond holders and the program (GF).Also, certain surplus interest due to coupon limits are also shown.

FIGS. 32A to 32F show examples of a method, data model, and interfacesfor providing calculations of coupons, proceeds, and yields payable toholders of loss position subclasses. FIGS. 32A to 32B show examples of amethod, data model, and interfaces for managing the detailed structurelevel cash flows for the 4^(th) loss position. Referring to FIG. 32A, tomaintain the adjusted insuring bond price level while providing an extrayield for the 4^(th) loss position, the coupon to be paid to the holderof a certificate for the 4^(th) loss position is computed, using forexample, GOALSEEK. That is an additional coupon is added representingthe risk that the holder takes that the coupons will be intercepted.Shown for each payment date, are subclass principal (column D), adjustedcoupon on insuring coupon (E), base insuring bond coupon (F), basedinsuring bond yield (G), yields for AA insuring subclass structuredenhance (H), AA insuring subclass spread to base yield, which is theadditional yield for this class for taking the extra risk (I), creditspread which can be empty (J), credit spread which can be the same asfrom column I, a marketing penalty (L), marketing penalty (M), netpenalty (N), total yield (O), and amounts net yield that are available(P).

FIG. 32B continues the calculations and interface. Shown for eachpayment date are total net yield from bond (Q=G+O), original insuringbond price (R), adjusted insuring bond price (S), interest couponsurplus or shortfall % (T) estimated adjusted versus target price toworst (U), the estimated adjusted maturity coupon which is computed, forexample, using GOALSEEK based on the proceeds/pricing being level andthe adjusted yield (V), final insuring bond coupon (W which can be thesame as V), original bond proceeds (X), adjusted bond proceeds (Y whichis kept level with X), and any interest coupon surplus or shortfall (Z).FIG. 32A to 32B are examples for the 4^(th) loss class, but other lossclasses' information, e.g., for the higher loss classes, can be computedand displayed in a similar manner.

Because these loss positions' credit rating are not associated standardmarket yield information, to maintain the debt service constant, and toprovide a coupon that is at a pre-determined increment above theprevious loss position levels, the incremental yield is computed, usingany financial projection algorithm, including the YIELD function ofExcel, as shown in FIG. 32C to 32E. FIGS. 32C to 32E show examples of amethod, data model, and interfaces for calculating of reallocatedinterest available for lower loss position classes. A summary isprovided which includes interest reallocated from the higher lossposition bonds to the lower loss position bonds, the impact of thehigher loss position bonds credit and marketing penalty, interestreallocated to the higher loss position bonds, and total higher lossposition debt service. Shown for each payment date are par of higherloss position insuring bonds (CV), original higher loss positionmaturity interest (CW), original higher loss position debt service (CX),higher loss position interest rate including reallocated interest fromstructured insured bonds (CY), higher loss position maturity interestreallocated from the structured insured bonds (CZ), higher loss positiondebt service including reallocated interest (DA), reallocated intereston higher loss position bonds from structured insured bonds (DB),reallocated interest on higher loss position bonds from structuredinsured bonds as a percent of par (DC).

The calculations continue on interface of FIG. 32D. For varioussubclasses, a summary is provided including adjusted proceeds, any bondinsurance premiums, COIs, base takedowns, and net bond proceeds. Shownfor each payment date, are the fourth loss subclass interest ratecalculated from FIG. 32B (column DD), the fourth loss subclass maturityinterest (DE), the fourth loss subclass debt service which is maintainedlevel fro FIG. 32B (DF), third loss subclass interest rate (DG), thirdloss subclass maturity interest (DH), third loss subclass debt service(DI), second loss subclass interest rate (DJ), second loss subclassmaturity interest (DK), second loss subclass debt service (DL), higherloss insuring bonds debt service adjusted for credit spread andmarketing penalty (DM), net impact of credit spread and marketingpenalty on higher loss position bonds (DN), and reallocated interestfrom higher loss position bonds available for the lower loss positionbonds and program expenses (DO). Thus, the amount of DO can be used topay the coupons for the lower loss positions holders.

The calculations continue on interface of FIG. 32E. A summary isprovided for the original and adjusted higher loss position proceeds(which should be the same or substantially the same). Shown for eachpayment period, are the lower loss position insuring bonds par (columnDP), the reallocated interest on the lower loss position insuring bondsfrom the structured insured bonds in percents (DQ), the reallocatedinterest on the lower loss position insuring bonds from the structuredinsured bonds in dollars (DR), the semi-annual interest reallocated tothe lower loss position bonds from the structured insured bonds indollars (DS), the program revenues as a percentage (DT), programrevenues as dollar amounts (DU and DV), total interest reallocated tothe lower loss position insuring bonds in dollars (DW), lower lossposition reallocated interest on the lower loss position insuring bondsin basis points on the lower loss position par (DX), reallocatedinterest on the lower loss position insuring bonds to maturity indollars (DY), additional coupons on the lower loss position bonds tomaturity in percent (DZ), interest coupon on lower loss positioninsuring bond to maturity (EA), and the bond yield on the lower lossposition insuring bonds to maturity which is calculated based on EA andmaintaining the pricing level using, for example the YIELD function(EB).

The calculations continue on interface of FIG. 32F. FIG. 32F shows an ofa method, data model, and interfaces for summarizing the allocation ofthe lower loss position reallocated interest to the senior and juniorlower loss positions. A summary of calculated information is shown,including senior lower loss position bond proceeds, junior lower lossposition bond proceeds, total lower loss position bond proceeds. Eachproceeds information may include additional takedowns, base takedowns,cost of issue, and net proceeds. Shown for each payment date, are seniorlower loss position insuring bond par (column EC), reallocation intereston senior lower loss position to maturity in dollars (ED), additionalcoupon on senior lower loss position insuring bond to maturity which isa portion of the reallocated interest from the higher loss positioncalculated above (EE), interest coupon on senior lower loss positioninsuring bonds to maturity (EF which includes EE), bond yield on seniorlower loss position insuring bond to maturity which is computed usingthe YIELD function based on the adjusted coupon and the level pricing ofthe senior lower loss position (EG), interest reallocated to seniorlower loss position bonds in dollars and basis points (EH and EI).Corresponding information for the junior lower loss position bonds arealso calculated and provided. Shown for each payment date, are juniorlower loss position insuring bond par (column EJ), reallocation intereston junior lower loss position to maturity in dollars (EK), additionalcoupon on junior lower loss position insuring bond to maturity which isa portion of the reallocated interest from the higher loss positioncalculated above (EL), interest coupon on junior lower loss positioninsuring bonds to maturity (EM which includes EL), bond yield on juniorlower loss position insuring bond to maturity which is computed usingthe YIELD function based on the adjusted coupon and the level pricing ofthe junior lower loss position (EN), interest reallocated to juniorlower loss position bonds in dollars and basis points (EO and EP). Alsoprovided is the surplus interest from the coupon limit (EQ).

FIGS. 33A to 33E shows an example of a method, data model, andinterfaces for providing calculations of debt service coverage based ondebt insurance. As shown, a bottom up computations is provided ofcoverage for a semi-annual basis, but other time-based analysis can beprovided without departing form the scope of the invention. The amountof debt that is repaid alternates semi-annually because of the need topay principal back in part of the year.

FIG. 33A shows credit enhancement provided to the Insured Bonds by thejunior lower loss position bonds to provide at credit enhancement to theInsured Bond and the Insuring Bonds at the next higher loss positionlevel to be a BB credit rating. A summary of the calculation shows theaverage annual worst case assumed defaults for the type of Insured Bond(e.g., A rated City and County GO), an average annual weighted defaulttolerance based on the debt service coverage shown, the coverage of thetarget default tolerance (weighted average divided by worst case assumeddefaults), the minimum for BB coverage as a percent of the total bondamount, and the margin of the actual debt service coverage provided bythe BECM method over the a required coverage (coverage of target defaulttolerance minus minimum BB coverage). The margin shows that the debtservice covers over an assumed default at a higher rate. Also shown areeffects due to downgrade of the Insured Bonds' credit rating one or twolevels below the current level. The margin decreases with the downgradeof the credit rating.

As shown in FIG. 33A, column IQ provides the semi-annual amount of theSenior Insuring Bond debt service. IR shows the Junior Insuring Bonddebt service (e.g., that can be intercepted). IS shows other availablemoneys that can be used to pay the Insured Bond debt service. IT showsthe covered debt service that is provided for the Insured Bond. IU showsthe total amount of available insured debt service (e.g., IR+IS+IT). IVshows the coverage of insured debt service (e.g., IU/IT). Column IWshows the semi-annual default tolerance (e.g., (IV−1)/IV). IX shows thetwo semi-annual default tolerance averaged together for the year. IYshows the 4-year default tolerance which is the running count from IX ofthe last 4 years. IZ shows the required default tolerance for a AAArating. JA shows the excess of coverage from IX or IY over that requiredto enhance a bond to be BB. JB shows the percentage of Insuring Bondsthat are used as the intercepted debt service shown in IQ and/or IR.

FIG. 33B shows one level of enhancement above those shown in FIG. 33A.The debt service of FIG. 33A can be intercepted and used to enhanceInsured Bonds and the Insuring Bonds at the next level to a BBB creditrating. The summary is substantially the same as FIG. 33A, except theaverage values are computed for the scenario shown, and the minimum BBBcoverage requirement is to compute the margin of actual over requiredcoverage of assumed defaults.

As shown in FIG. 33B, column IF includes the subclass debt serviceprovided by the debt service of FIG. 33A (e.g., from column IQ+IR ofFIG. 33A). This subclass debt service can be intercepted as describedherein. All other values of IG-IO are similar to the calculation shownin FIG. 33A. As shown, the 4-year default tolerance provided is muchhigher than that required by the minimum BBB coverage requirement.

FIG. 33C shows one level of enhancement above those shown in FIG. 33Bincluding intercepting the debt service from FIG. 33B, and enhancing thenext highest level and the Insured Bond to be an A credit rating. Thecalculations are substantially similar to those described above.

FIG. 33D shows one level of enhancement above those shown in FIG. 33Cincluding intercepting the debt service from FIG. 33C, and enhancing thenext highest level and the Insured Bond to be an AA credit rating. Thecalculations are substantially similar to those described above.

FIG. 33E shows one level of enhancement above those shown in FIG. 33Dincluding intercepting the debt service from FIG. 33D, and enhancing theInsured Bond to be an AAA credit rating. The calculations aresubstantially similar to those described above.

FIG. 33F shows an example of a method, data model, and interface forproviding a summary of a debt service coverage based on debt insurance.As shown, a top down computations is provided of coverage for asemi-annual basis, but other time-based analysis can be provided withoutdeparting form the scope of the invention. In this example, the debtservice coverage results in a credit enhancement of an A-rated City andCounty GO bond to an AAA rated. A summary of the calculation shows theaverage annual worst case assumed defaults for this type of bond, anaverage annual weighted default tolerance based on the debt servicecoverage, the coverage of the target default tolerance (weighted averagedivided by worst case assumed defaults), the minimum for AAA coverage asa percent of the total bond amount, and the margin of the actual debtservice coverage provided by the BECM method over the a requiredcoverage (coverage of target default tolerance minus minimum AAAcoverage). The margin shows that the debt service covers several ordersof magnitude above what is needed to enhance the credit of the bond toAAA. For example, this margin can enhance this bond to a “True AAA.”

Column GI shows the amount available for the Adjusted Debt Service plusother available less certain fees. The amount for column GI shows thecash streams from the underlying Insuring Bonds and other capital (e.g.,regulatory capital). Column GJ shows the amount of structured insuredebt service that is needed to be paid to the Insured Bond holders.Column GK shows the coverage the amounts from Column GI divided by theamount from Column GJ. Column GL shows the semi-annual default tolerance(e.g., (GK−1)/GK). The average for the year of any two numbers in theyear is shown in GM. The 4 year default tolerance of GN is a runningaverage of the GM in the last 4 years. Column GO shows the worst caseassumed annual defaults. As shown, the amount from GM is much higherthan the worst case scenario of GO, thus increasing the credit rating ofthe covered bond.

Further aspects and embodiments of the invention described hereinrelates to a computer-implemented system for minimizing risk as to adefault on payments associated with an investment. The system caninclude a company computer implemented component. The component can beconfigured for establishing by an insurer a capital structure within acomputer memory of a computer system, the capital structure designed tominimize risk and structured with regulatory capital and a cash streamthat is pledged to fund the default; determining whether the establishedcapital structure is sufficient to obtain a minimal target credit ratingfor the insurer; and electronically receiving the target rating based ona determination that the capital structure is adequate to cover adepression scenario period.

In one embodiment, the target credit rating is AAA, wherein theinvestment comprises an Insured Bond issued by an issuer, and the cashstream is produced from an Insuring Bond issued by the issuer.

In yet another embodiment, the investment can include a previouslyissued bond issued by an issuer, and the cash stream is produced by aninvestment unrelated to the issuer and is used as re-insurance or thepreviously issued bond.

Establishing the capital structure can include allocating the regulatorycapital in the computer memory to an amount equal to a coverage factormultiplied by an average annual depression scenario default percentagefor the investment; selecting by the computer system an investmentcriteria to invest the regulatory capital to create an investmentreturn; determining by the computer system a portion of the capitalstructure for a pledged insuring investment that produces at least aportion of the cash stream; and securing a draw on sources of theregulatory capital based on the portion of the cash stream.

In one embodiment, determining the credit rating can include including acapital pre-funding in the capital structure; determining by thecomputer system an amount of capital pre-funding by the insurer that issufficient to cover a default and that is calculated by (a) at least apre-funding coverage factor multiplied by (b) a downgrade function thatis applied to an average annual depression scenario default percentagefor the investment based on the credit rating of the investment;examining by the computer system, a capital adequacy of the insurer'scapital structure to cover a default based on a default scenario thatoccurs during or at an end of a depression scenario period; anddetermining the credit rating for the insurer based on the determinedcapital pre-funding and the examined capital adequacy.

The invention also relates to a processor readable medium for minimizingrisk as to a default on payments associated with an investment,comprising processor readable instructions that when executed by aprocessor causes the processor to perform actions. The actions caninclude establishing by an insurer a capital structure within a computermemory of a computer system, the capital structure designed to minimizerisk and structured with regulatory capital and a cash stream that ispledged to fund the default; determining whether the established capitalstructure is sufficient to obtain a minimal target credit rating for theinsurer; and electronically receiving the target rating based on adetermination that the capital structure is adequate to cover adepression scenario period.

The invention also relates to a computer-implemented method, system,apparatus, and media for insuring a default of debts specified infinancial instruments. The method may include the steps of establishing,by a computer processor, an insuring debt related to an insured debt ofa debtor based on an insured debt amount representing at least aproportion of the insured debt; allocating, in a computer memoryassociated with an insuring trust, a first loss class and a second lossclass; and routing, over a computer network, a payment payable from theinsuring debt to a first class holder in the first class, wherein thefirst class holder is entitled to the payment based on a debt to thefirst class holder of an insuring fund of the insuring trust, andwherein the insuring fund is for insuring an obligation to make paymentsfor the insured debt.

The method may further include intercepting at least a portion of thepayment, when the debtor defaults on the obligation to make payments forthe insured debt; allocating at least a portion of the payment to thefirst class holder less an unrelated payment to cure an unrelateddefault of an unrelated insured debt associated with the second class,when the first class is junior to the second class in a rating scale;and intercepting an unrelated payment from an unrelated insuring debtassociated with the second class, when the second class is junior to thefirst class in the rating scale, and when the debtor defaults on theobligation to make payments for the insured debt.

The method may further include intercepting providing an insuringpayment from the insuring trust to a holder of the insured debt, whenthe debtor defaults on the obligation to make payments for the insureddebt, wherein the insuring payment is deducted from a related fund inthe insuring trust related to the insured debt before the insuringpayment is deducted from an unrelated fund in the insuring trust that isunrelated to the insured debt.

In one embodiment, allocating includes providing a credit rating fortrust issued debts associated with the first class or second class basedon a subordination of the first class to the second class; and issuingelectronic certificates to the first and second classes based on thecredit rating of the classes, wherein holders of the electroniccertificates are entitled to satisfaction from the insuring trust fortrust held debt.

In one embodiment, the insured debt and the insured debt are bondsissued by a municipality, wherein the payments are credit enhancementcoupons. This establishing can include determining that a credit ratingfor the insured debt is BBB or better; determining an insuring debtamount of the insuring debt based on an annual depression-scenarioassumed defaults percentage for the debtor times a multiple of at least2; and maintained constant, for any payment from the insured or insuringdebts, a proportion of the insured debt amount to the insuring debtamount; pre-funding the insuring fund with cash equity in an amount ofthe annual depression-scenario assumed defaults percentage for thedebtor times another multiple of at least 1. The multiples can beselected as desired for optimum safety in the investment.

The method may further include sending a credit information record ofthe insured debt based on an insurance payment configuration for theinsured debt that is structured in the computer memory; and receiving anincrease in a credit rating for the insured debt based on the sentcredit information record.

Another embodiment of the invention is a device for debt management. Thedevice can include a computer memory configured to manage financialdata; and a computer processor configured to perform actions. Theactions can include establishing an insuring debt for a debtor relatedto an insured debt of a debtor based on proportion of an insured debtamount of the insured debt to the insuring debt amount of the insuringdebt, wherein the proportion is maintained constant for any redemptionfrom the insured or insuring debts; allocating an insuring trust, afirst loss class and a second loss class; and routing a first paymentpayable from the insuring debt to a holder in the first class, whereinthe holder is entitled to the first payment based on a debt to theholder of an insuring fund of the insuring trust, and wherein theinsuring fund is for insuring an obligation to make payments for theinsured debt.

The actions of the processor can further include intercepting a firstpayment of the payments when the debtor defaults on the obligation tomake payments for the insured debt; allocating a second payment of thepayments to cure an unrelated default of an unrelated debt associatedwith the second class, when the first class is junior to the secondclass in a rating scale; allocating an unrelated payment from anunrelated insuring debt associated with the second class, when thesecond class is junior to the first class in the rating scale, and whenthe debtor defaults on the obligation to make payments for the insureddebt; debiting a remaining payment from a cash capital when otherpayments are insufficient to cover the defaults on the obligation tomake payments for the insured debt; and providing an insuring paymentfrom the insuring trust to holders of the insured debt, when the debtordefaults on the obligation to make payments for the insured debt,wherein the insuring payment comprises at least one or a combination ofthe first payment, the unrelated payment, or the remaining payment.

The actions of the processor can further include receiving, before theissuance of the insured debt, loss class payments in exchange forownership in the loss classes, wherein the loss class payments is forpre-funding a portion of the insuring fund; sending a credit informationrecord of the insured debt based on an insurance payment configurationfor the insured debt that is stored in the computer memory; receivingthe increase in the credit rating for the insured debt based on the sentcredit information record; routing the increase to the debtor, therebyenabling the debtor to decrease an interest payment payable by thedebtor for the insured debt; and receiving a portion of savings from adecreased interest payment from the debtor.

In one embodiment, the insured debt and the insuring debts are bonds,wherein the payments payable from the insuring debt are creditenhancement coupons. The actions can further include structuring, in afield in the computer memory associated with the insuring fund relatedto the Insured Bond, an upfront payment amount from the debtor, whereinthe upfront payment is a portion of a full amount due for insuring theInsured Bond; structuring, in the field, a remaining portion of the fullamount less the upfront payment, wherein the remaining portion is fundedby the debt of the insuring fund; structuring, in a field of thecomputer memory associated with a payment fund, at each of a pluralityof time intervals, a plurality of credit enhancement coupons payablefrom the Insuring Bond, wherein the fund is for paying the debt of theinsuring fund, and wherein a sum of the credit enhancement coupons overthe time intervals covers the remaining portion; and providing aninsuring payment to holders of the Insured Bonds, when the computermemory indicates required payments to cure the default, wherein theinsuring payment is deducted from the insuring fund that is related tothe Insured Bond before the insuring payment is deducted from anunrelated fund that is unrelated to the Insured Bond.

In one embodiment, the upfront payment is insufficient to cure thedefault, the insuring payment is deducted from a portion of the insuringfund associated with at least one of the credit enhancement coupons, andwherein an outgoing payment from the payment fund is prohibited when adefault to pay at least a portion of the insured debt amount occurs.

Another embodiment of the invention is a system for managing debtinsurance over a computer network. The system can include acomputer-implemented issuer component for establishing an insuring debtrelated to an insured debt of a debtor based on an insured debt amountrepresenting at least a proportion of the insured debt, wherein theproportion is maintained constant for any redemption from the insured orinsuring debts.

The system can include a computer-implemented insuring trust componentfor allocating, in an insuring trust, a first loss class having a firstloss class holder and a second loss class having a second loss classholder; routing, over the computer network, a payment payable from theinsuring debt to a first class holder in the first class, wherein thefirst class holder is entitled to the payment based on a debt to thefirst class holder of an insuring fund of the insuring trust, andwherein the insuring fund is for insuring an obligation to make paymentsfor the insured debt.

In one embodiment, routing to the first loss class holder the relatedpayment further includes allocating the related payment. In oneembodiment, (a) a portion of a defaulted insured debt service for adefault of an obligation on the insured debt is deducted from therelated payment; and (b) a portion of the defaulted insured debt servicefor the default of the obligation is deducted from the related payment,if another debtor defaults on an unrelated obligation and the first lossclass is junior to the second loss class; and (c) a portion of therelated payment is added to an unrelated payment, if a portion of aprior unrelated payment from an unrelated insuring debt was used to fundthe defaulted insured debt service for the insured debt.

In one embodiment, the computer-implemented insuring trust component isfurther configured for routing to the second loss class holder theunrelated payment for an unrelated insuring debt, by allocating theunrelated payment. In one embodiment, (a) a portion of the defaultedinsured debt service for a default of the unrelated obligation isdeducted from the unrelated payment; (b) a portion of the defaultedinsured debt service for the default of the unrelated obligation isdeducted from the related payment, if the debtor defaults on theobligation and the second loss class is junior to the first loss class;and (c) a portion of the unrelated payment is added to the relatedpayment, if a portion of a prior related payment from the insuring debtwas used to fund the defaulted insured debt service for the unrelatedinsured debt.

In one embodiment, the computer-implemented trust component isconfigured to provide the first loss class holder with an firstelectronic certificate in the insuring trust related to the insureddebt, and to provide the second loss class holder with a secondelectronic certificate in the insuring trust unrelated to the insureddebt, and wherein the insured and insuring debts are bonds.

The system may also include a computer-implemented trustee componentconfigured for receiving, over the network, non-default principal andinterest payments for the insured debt and the insuring debt from theissuer component; and routing pro-rata amounts of the non-defaultpayments between holders of the insured debt and the insuring trust thatholds the insuring debt.

The system may also include a computer-implemented guarantor componentconfigured for receiving, over the network, an insuring trust payment inan amount of the defaulted insured debt service; routing to the trusteecomponent, based on the received insuring trust payment, a defaultamount sufficient to satisfy the obligation on the insured debt;receiving an upfront payment from the issuer component for guarantyingthe insured debt; pre-funding at least a portion of the insuring trustwith funds from the first loss class holder that are received inexchange for a first electronic certificate for the first loss class;receiving a contractual record indicating a right to receive a portionof the principal and interest in the insuring debt's cash flow, if thedefault occurs; sending, to the insuring trust component, a portion ofthe upfront payment, wherein the portion of the upfront payment isconfigured to be paid by the insuring trust component into the defaultedinsured debt service if the default occurs; and receiving a portion ofinterests in at least one of a plurality of debts managed by theinsuring trust component.

In one embodiment, the system can include a computer-implemented creditagency component configured for receiving, over the network, a creditinformation record of the insured debt based on insurance paymentstructuring for the insured debt; and providing an increase in a creditrating for the insured debt based on the received credit informationrecord.

Another embodiment of the invention is processor readable mediumcomprising instructions that are executable by a computer processor tocause the processor to perform actions. The actions can includeestablishing an insuring debt related to an insured debt of a debtorbased on an insured debt amount representing at least a proportion ofthe insured debt; allocating, in a computer memory associated with aninsuring trust, a first loss class and a second loss class; and routing,over a computer network, a payment payable from the insuring debt to afirst class holder in the first class, wherein the first class holder isentitled to the payment based on a debt to the first class holder of aninsuring fund of the insuring trust, and wherein the insuring fund isfor insuring an obligation to make payments for the insured debt.

In one embodiment, the actions further includes increasing a creditrating for the insured debt based on a credit formula with inputs thatare independent of a profitability of the insuring trust, wherein theinputs comprises an amount of insurance available for insuring theobligation that includes an amount in the insuring funds for insuringthe obligation.

It is to be understood that the invention is not to be limited to theexact configuration as illustrated and described herein. Accordingly,all expedient modifications readily attainable by one of ordinary skillin the art from the disclosure set forth herein, or by routineexperimentation there from, are deemed to be within the spirit and scopeof the invention as defined by the appended claims.

For the sake of brevity, it should be understood that certain structuresand functionality, or aspects thereof, of embodiments of the presentinvention that are evident from the illustrations of the Figures havenot been necessarily restated herein.

A computer or processor readable medium such as a floppy disk, CD-ROM,DVD, etc. may be use to store the processes, techniques, software, andinformation illustratively described herein. The media may storeinstructions, which when executed by a computer processor causes theprocessor to perform the processes described herein. The media can alsobe stored on devices, such as a server device, within a database, withinmain memory, within secondary storage, or the like.

Further still, the memory of the system may comprise a magnetic harddrive, a magnetic floppy disk, a compact disk, a ROM, a RAM, and/or anyother appropriate memory. Further still, the computer of the system maycomprise a stand-alone PC-type micro-computer as depicted or thecomputer may comprise one of a mainframe computer or a mini-computer,for example. Further still, another computer can access the softwareprogram being processed by the CPU by utilizing a local area network, awide area network, or the Internet, for example.

Attachment A

ATTACHMENT A shows one example of a definition for implementing the BECMsystem. ATTACHMENT A is disclosed as a non-limiting example of thedefinitions, rules, algorithms, and parameters for implementing the BECMsystem. The components of the BECM system can be programmed by oneskilled in the art to perform the operations as defined below. Otherembodiments or variations of ATTACHMENT A can be implemented withoutdeparting from the scope of the invention.

Key Provisions of Trust Agreement Article I: Definitions

“Administrator” means, with respect to the Regulated Guarantor, TheBondModel Company LLC, a Delaware limited liability company (and itssuccessors and assigns) or a successor firm selected by the RegulatedGuarantor.

“Aggregate Loss Subclass Percentage” means, for each Loss PositionSubclass and with respect to each Supported Bond Issue or SupportedTransaction, the Average Annual Assumed Default multiplied by the LossSubclass Minimum Coverage multiplied by the Loss Subclass DiscountPercentage multiplied by the Loss Subclass Coverage Factor. Thisrepresents the sum of the Loss Subclass Percentage Requirements for eachLoss Position Subclass and all of the lower Loss Position Subclasses.For example, initially, for an A rated city or county general obligationbond issue, the Aggregate Loss Subclass Percentage for the 4th LossPosition Subclass equals 1.75% multiplied by 1.00 multiplied by 100%multiplied by 1.6, or 2.80%. Correspondingly, the Aggregate LossSubclass Percentage for the 3^(rd) Loss Position Subclass equals 1.75%multiplied by 0.80 multiplied by 25% multiplied by 1.6, or 0.56%. A moredetailed illustration of the calculation of Aggregate Loss SubclassPercentage is included in Exhibit I. For each Supported Bond Issue orSupported Transaction, the Aggregate Loss Subclass Percentage shall bedeemed to be met for any Loss Position Subclass for which either:

-   -   A. The par amount or proceeds for each maturity of such subclass        and the lower subclasses at least equals the calculated        percentage of the par amount or proceeds, as the case may be, of        the Supported Bonds and Trust Bonds of such maturity or    -   B. The Average Annual Debt Service on the Trust Bonds of such        subclass and the lower subclasses at least equals the calculated        percentage of Average Annual Debt Service for such periods on        the total Supported Bonds and Trust Bonds of such Supported Bond        Issue or Supported Transaction.

For a particular Supported Bond Issue or Supported Transaction, it isnot required that the Trust Bonds in each Loss Position Subclass meetthe Aggregate Loss Subclass Percentage so long as the requirements ofSection 201 D relating to Minimum Trust Debt Service are met for eachLoss Position Subclass.

“Aggregate Trust Bond Requirement” means the Aggregate Loss SubclassPercentage for the highest Loss Position Subclass.

“Agreement” means this Trust Agreement between the [Regulated Guarantor]and the Trustee dated as of the date hereof.

“Allocated Capital Multiple” means 1.0× or such higher multiple as maybe established by the Regulated Guarantor, provided that, for anySupported Bond Issues or Supported Transactions for which the CashAlternative Capital Requirement is applied, it shall mean 9.2× (i.e., 4times 2.3). The higher multiple applicable for purposes of the CashAlternative Capital Requirement shall be applicable solely to thecalculation of the Capital Requirement and not for purposes of othercalculations hereunder, such as calculation of the LiquidityRequirement. The Allocated Capital Multiple may be reduced by theRegulated Guarantor upon confirmation by each Rating Agency that suchmodification will not cause a reduction of the Rating of any outstandingSupported Obligations or Trust Certificates.

“Allocated Capital Requirement” means the Annual Weighted AverageCapital Charge for the entire Supported Bond portfolio multiplied by theAllocated Capital Multiple multiplied by the Average Annual Debt Servicefor such Supported Bond portfolio (including Other SupportedObligations). In the event that the Cash Alternative Capital Requirementis used for any portion of the Supported Bond Portfolio, for purposes ofdetermining the Capital Requirement, the Allocated Capital Requirementshall consist of two parts that are calculated separately based on thetwo distinct multiples. For the purpose of calculating the CapitalRequirement relating to portion of the portfolio for which theAlternative Cash Capital Requirement is used, the Capital Requirementshall be calculated separately for each Supported Bond Issue orSupported Transaction using the Average Annual Debt Service of such bondissue or transaction.

“Annual Weighted Average Capital Charge” means 25% of the WeightedAverage Capital Charge. Such percentage may be modified by the RegulatedGuarantor upon confirmation by each Rating Agency that such modificationwill not cause a reduction in the Rating of any outstanding SupportedObligations or Trust Certificates.

“Appropriation Bond” means a bond the payment on which is subject toappropriation by the issuer thereof. A determination by the Chief CreditOfficer that a particular bond issue or issuer credit does or does notrepresent an Appropriation Bond credit shall be dispositive for purposesof this Agreement unless and until revised by the Chief Credit Officer.

“Authorized Officer” means, with respect to the Regulated Guarantor orits Administrator, the Chief Executive Officer, Chief Operating Officer,Chief Financial Officer, or Chief Credit Officer or another officerdesignated by the Chief Executive Officer thereof. Where a particularofficer is specified herein as authorized to perform certain actions,another officer may also be designated by the Chief Executive Officer.

“Average Annual Assumed Default” means the average annual assumeddefault over an assumed depression scenario for purposes of structuringthe Support Trust. Until modified as described below, the Average AnnualAssumed Default for any Supported Bond Issue shall be 25% of the CapitalCharge for such bond issue. In using the Average Annual Assumed Defaultto size the Trust Bonds and Trust Certificates related to any SupportedBonds, such Capital Charge shall apply to the total amount of SupportedBonds and related Trust Bonds, rather than solely to the SupportedBonds. For example, for an A rated city or county general obligationbond issue (and assuming that both Supported Bonds and related TrustBonds are part of the Supported Bond Issue), the Average Annual AssumedDefault is 25% of 7% or 1.75%. As a result, and before application ofother factors (such as Loss Subclass Minimum Coverage, Loss SubclassDiscount Percentage, and Loss Subclass Coverage Factor), the Trust Bondswould represent 1.75% of the total par amount, proceeds, or debt serviceof Supported Bonds and Trust Bonds of each maturity. The Average AnnualAssumed Default may be modified by the Regulated Guarantor uponconfirmation by each Rating Agency that such modification will notresult in a reduction of the Rating of any outstanding SupportedObligations or Trust Certificates.

“Average Annual Debt Service” means:

-   -   I. For purposes of determining the Weighted Average Capital        Charge, with respect to the Supported Obligations of each        Supported Bond Issue or Supported Transaction and any related        Other Supported Obligations, (A) the total debt service on such        Supported Obligations for the period from the date of issuance        to the maturity of such bonds and obligations divided by (B) the        period from such date of issuance to the final maturity of such        Supported Bond Issue; and    -   II. For all other purposes with respect to particular        Obligations, including with respect to the entire portfolio of        Supported Obligations, (a) the total debt service on such        Obligations for the period from the date of the calculation to        the latest final maturity of such Obligations divided by (b)        such period.

The Average Annual Debt Service may be modified by the RegulatedGuarantor upon confirmation by each Rating Agency that such modificationwill not result in a reduction of the Rating of any outstandingSupported Obligations or Trust Certificates.

“Bond Issue Rating” means for each Rating Agency and with respect toeach Obligation, the rating of such Obligation without regard to anySupport Requirement hereunder and without regard to any guaranteeprovided by another monoline insurer. For all purposes hereunder, BondIssue Rating shall mean the rating category of an Obligation, withoutregard to pluses or minuses or numeric designations. For example, theRating of an Obligation with an assigned rating of A3 or A1 by Moody'sor of A− or A+ by Standard & Poor's or Fitch, shall be “A”. For purposesof any provision of this Agreement that requires a single Bond IssueRating (such as Capital Charge and Loss Subclass Discount Percentage),the Bond Issue Rating of a Supported Bond Issue shall mean the lowestBond Issue Rating of such issue from any Rating Agency unless (a) theChief Credit Officer shall specify that the Rating from another RatingAgency shall be used or (b) the Regulated Guarantor shall adopt distinctmethodologies for the different Rating Agencies, which may occur onlyupon confirmation from each Rating Agency that the adoption of suchdistinct methodologies will not result in a reduction in the Rating onany outstanding Supported Obligations or Trust Certificates. WhereverBond Issue Rating appears in this Agreement, the Regulated Guarantor, byaction of its Chief Credit Officer, may substitute Underlying Rating,provided that each Rating Agency shall have determined that such changeshall not result in a reduction of the rating of any outstandingSupported Obligations or Trust Certificates.

“Bond Year” means the period selected by the Regulated Guarantor for thecalculation of annual aggregate debt service for the Supported Bonds.Unless otherwise determined by the Regulated Guarantor, the same periodshall be used for the calculation of annual aggregate debt service onother Obligations. For the purposes of calculating annual aggregate debtservice on Trust Certificates and Trust Bonds, the Regulated Guarantormay select a distinct period. The Regulated Guarantor may modify theperiod selected as the Bond Year for any Obligations upon confirmationby each Rating Agency that such modification will not result in areduction of the Rating on any outstanding Supported Obligations orTrust Certificates.

“Borrowed Funds” means money obtained by the issuance of debt by theRegulated Guarantor or the Support Trust, which debt is secured in wholeor in part by:

-   -   1. Investment earnings on such Borrowed Funds;    -   2. The obligation to apply such Borrowed Funds to repay the        principal of such debt at the maturity thereof; and    -   3. The obligation of the Trustee pursuant to Section 301 hereof,        in the event that any such Borrowed Funds and earnings are        applied to fund a default with respect to Supported Obligations,        to reimburse the amounts so applied with interest thereon.

“Capital” means funds being used to meet the Capital Requirement.

“Capital Charge” means for a Supported Bond Issue, the capital chargefor such issue determined in accordance with S&P's 2009 MonolineCriteria. For example, the Capital Charge for an A-rated city or countygeneral obligation bond issue is 7%. The Capital Charges for variouscredit types are set forth in Exhibit II. Such Capital Charges may bemodified by the Regulated Guarantor upon confirmation by each RatingAgency that such modification will not cause the reduction of the Ratingon any outstanding Supported Obligations or Trust Certificates.

“Capital Fund” means the fund established under this Agreement by theTrustee to hold the Capital and investments thereof.

“Capital Requirement” means the greater of the Rating Minimum CapitalRequirement and the Allocated Capital Requirement.

“Cash Alternative Capital Requirement” means an alternative methodpermitted hereunder for funding required capital for specific SupportedBond Issues or Supported Transactions using cash only rather than TrustBonds. This requirement represents the amount of cash capital requiredto withstand a full depression-scenario default and to still retain AAAratings.

“Chief Credit Officer” means ______.

“Chief Legal Officer” means ______.

“Counsel” means Winston and Strawn LLP or such other firm selected bythe Regulated Guarantor.

“Debt Service” or “debt service” means, for any period and with respectto any Obligation, the principal and interest (and, if applicable, anyother payments that are the subject of a Support Requirement) coming dueduring such period. In determining debt service payable on SupportedBonds and any Other Supported Obligations, debt service shall mean thehigher of (a) the ongoing debt service payable on such Supported Bondsand Other Supported Obligations and (b) the debt service that would bepayable on such Supported Bonds and Other Supported Obligations upon theoccurrence of any event which would have the effect of accelerating theissuer's amortization of such Obligations. The Regulated Guarantor orFinancial Advisor may make such adjustments or refinements to thecalculation of debt service or amounts payable with respect toObligations (for example, refinements to deal with variable rate debt orcapitalized interest and including annual fees or other ongoing paymentsas debt service) as it deems appropriate, provided that each RatingAgency has confirmed that such adjustments and refinements will notresult in a reduction in the Rating on any outstanding SupportedObligations or Trust Certificates.

“Default Tolerance Requirements” means, with respect to each RatingAgency, all of the tests and requirements contained in the methodologyestablished under Section 203 for such Rating Agency.

“Designation” means a designation by the Regulated Guarantor thatcertain Qualifying Bonds and Other Related Obligations, in accordancewith the terms hereof, shall be beneficiaries of a Support Requirementhereunder. A Designation shall become effective, subject to issuance ofan insurance policy by the Regulated Guarantor, at the time that theRegulated Guarantor:

-   -   1. Enters into a contractual agreement based on such        Designation, regardless of whether such agreement is subject to        conditions;    -   2. Submits a bid or proposal to enter into such a contractual        agreement; or    -   3. Delivers a certificate modifying the amount of Supported        Bonds or Trust Bonds of a Supported Bond Issue in accordance        with Section 201.

Upon such a Designation and the issuance of the related insurancepolicy, the Qualifying Bonds shall become Supported Bonds and the OtherRelated Obligations shall become Other Supported Obligations. Withrespect to a Supported Bond or Other Supported Obligation, “designated”means that such Obligation is the subject of a Designation.

“Financial Advisor” means ButcherMark Financial Advisors LLC or suchother qualified firm selected by the Regulated Guarantor.

“Fitch” means Fitch Ratings, Ltd.

“Insurance Law” means the New York Insurance Law, as the same may bemodified from time to time.

“Liquidity” means:

-   -   1. Funds held under this Agreement, including Borrowed Funds,        being used to meet the Liquidity Requirement; and    -   2. Amounts available under a Liquidity Facility pursuant to        which the Trustee or the Regulated Guarantor has the right to        draw funds needed to provide liquidity, provided that each        Rating Agency confirms that the use thereof will not cause a        reduction in the Rating of any outstanding Supported Obligations        or Trust Certificates.    -   3. The portion of Capital required due to the use of the higher        Allocated Capital Multiple applicable for purposes of the Cash        Alternative Capital Requirement.    -   4. Regulatory capital held by the Regulated Guarantor and        premiums held by the Regulated Guarantor, provided in each case        that investments of such amounts would be permitted investments        of Liquidity under this Agreement.

The initial term of any debt issued to provide such Borrowed Funds shallnot be less than years and remaining term of such debt shall not be lessthan months unless each Rating Agency for the Supported Obligations hasconfirmed that the shorter term will not cause a reduction in the Ratingof any outstanding Supported Obligations or Trust Certificates. Suchlimitation as to term shall not apply to the repayment obligation withrespect to a Liquidity Facility.

“Liquidity Facility” means a letter of credit, line of credit or othersimilar agreement upon which the Trustee may draw to fund a defaultedpayment on Supported Obligations.

“Liquidity Fund” means the fund established under this Agreement by theTrustee to hold the Liquidity and investments thereof

“Liquidity Multiple” means 2.0×. The Liquidity Multiple may be modifiedby the Regulated Guarantor upon 30 days notice to each Rating Agency,provided that it shall not be less than the Rating Liquidity Multiple.

“Liquidity Requirement” means the Liquidity Multiple multiplied by theAllocated Capital Requirement (calculated without regard to the CashAlternative Capital Requirement). The Liquidity Requirement is a measureof liquid resources required to be available either within the Trust, ordirectly to the Regulated Guarantor, solely for the purpose of makingpayments required to cure a payment default on a Supported Obligation.

“Loss Category Subclasses” means subclasses of bonds established by theRegulated Guarantor within a Loss Position Subclass for the purpose ofallocating losses within the subclass first to those Trust Certificateswhose related bonds have characteristics (such as credit type) that, inthe judgment of the Chief Credit Officer, are similar to the other bondswithin such subclass, thereby reducing the possibility that such losseswill be allocated to Trust Certificates whose related bonds havecharacteristics that are dissimilar to any defaulted Supported Bonds.Loss Category Subclasses may also be established by the RegulatedGuarantor where such subclass includes multiple Loss Position Subclasses(i.e. losses within the Loss Category Subclass would be allocated byLoss Position Subclass). In either case, prior to any Loss CategorySubclasses being established, each Rating Agency must confirm that theuse thereof will not result in a reduction in the Rating on anyoutstanding Supported Obligations or Trust Certificates.

“Loss Position Subclasses” means various subclasses of TrustCertificates (and the Trust Bonds related to such Trust Certificates)that indicate the order in which the amounts payable with respect to theTrust Certificates are intercepted in order to cure a default withrespect to a Supported Bond Issue. The inverse of such order representsthe order in which the subclasses are to be reimbursed for fundsintercepted to fund a defaulted payment or reimbursement therefore.Until modified as described below, the loss subclasses shall be:

-   -   1^(st) Loss Position Subclass    -   2^(nd) Loss Position Subclass    -   3^(rd) Loss Position Subclass    -   4^(th) Loss Position Subclass    -   5^(th) Loss Position Subclass

A lower number associated with a Loss Position Subclass means that suchsubclass is more exposed to having its cash flows intercepted than asubclass with a higher number. Trust Certificates may also be issuedwhich are comprised of multiple Loss Position Subclasses. The LossPosition Subclasses may be modified by the Regulated Guarantor at anytime (and for purposes of determining Minimum Trust Debt Service) uponconfirmation by each Rating Agency that such modification will notresult in a reduction of the Rating of any outstanding SupportedObligations or Trust Certificates.

“Loss Subclass Capital and Liquidity Requirement” means, with respect toa particular Loss Position Subclass, a portion of the Capital andLiquidity equal to an amount specified by the Regulated Guarantor forsuch subclass, which portion of the Capital and Liquidity, to the extentavailable and provided that it is sufficient to cure any defaults onSupported Obligations:

-   -   A. Shall be applied to cure such defaults prior to the        interception of Trust Certificate Payments of such subclass (or        any higher subclass) for such purpose; and    -   B. Shall not be reimbursed from the Trust Certificate Payments        of such subclass (or any higher subclass) for the period        specified for such subclass; provided that the limitation on        reimbursement from such payments shall not apply if in the        judgment of the Chief Credit Officer of the Regulated Guarantor,        the failure to reimburse Capital and Liquidity (a) might result        in a reduction of the Rating of a higher Loss Position Subclass        or of the Supported Bonds or (b) might impair the ability of the        Support Trust to reimburse such Capital and Liquidity.

Initially, the Loss Subclass Capital and Liquidity Requirements andassociated periods are as follows:

Loss Position Subclass Requirement (cumulative including SpecifiedSubclass lower subclass requirements) Period 5^(th) Subclass 4^(th)Subclass 3^(rd) Subclass 2^(nd) Subclass 1^(st) Subclass NA NA

The specified requirements and periods may be modified by the RegulatedGuarantor (including during the pendency of a default) provided thateach Rating Agency shall confirm that such modification will not cause areduction in the Rating of any outstanding Supported Obligations orTrust Certificates.

“Loss Subclass Coverage Factor” means the Trust Coverage Requirementdivided by the Loss Subclass Minimum Coverage for the highest LossPosition Subclass. For example, initially, the Loss Subclass CoverageFactor is 2.0 divided by 1.25 which equals 1.6.

“Loss Subclass Discount Percentage” means the percentage of the LossSubclass Minimum Coverage that applies to each Loss Position Subclassfor a particular Supported Bond Issue. Unless modified as describedbelow, the Loss Subclass Discount Percentage for each Loss PositionSubclass shall be based on the relationship between the Structure Ratingcategory for the next higher subclass (and, in the case of the highestloss position subclass, for the Supported Bonds) and the Bond IssueRating for the Supported Bond Issue as follows:

-   -   Bond Issue Rating lower than Structure Rating category for next        higher subclass: 100%    -   Bond Issue Rating equal to Structure Rating category for next        higher subclass: 25%    -   Bond Issue Rating one category higher than Structure Rating        category for next higher subclass: 20%    -   Bond Issue Rating two categories higher than Structure Rating        category for next higher subclass: 15%    -   Bond Issue Rating three or more categories higher than Structure        Rating category for next higher subclass: 10%

The Loss Subclass Discount Percentage may be modified by the RegulatedGuarantor upon confirmation by each Rating Agency that such modificationwill not result a reduction of the Rating of any outstanding SupportedObligations or Trust Certificates.

“Loss Subclass Minimum Coverage” means for each respective Loss PositionSubclass, the following coverage of Average Annual Assumed Defaults:

-   -   5^(th) Loss Subclass: 1.25    -   4^(th) Loss Subclass: 1.00    -   3^(rd) Loss Subclass: 0.80    -   2^(nd) Loss Subclass: 0.64    -   1^(st) Loss Subclass: 0.56

The Loss Subclass Minimum Coverage may be modified by the RegulatedGuarantor upon confirmation by each Rating Agency that such modificationwill not result in a reduction of the Rating on any outstandingSupported Obligations or Trust Certificates.

“Loss Subclass Percentage Requirement” means for each Loss PositionSubclass and with respect to each maturity of each Supported Bond Issueor Supported Transaction, the Aggregate Loss Subclass Percentage forsuch Loss Position Subclass minus the Aggregate Loss Subclass Percentagefor the next lower Loss Position Subclass. For example, in theillustration used in the definition of Aggregate Loss SubclassPercentage, for the 4th Loss Position Subclass, the Loss SubclassPercentage Requirement equals 4.20% minus 0.84%, which equals 3.36%. Fora particular Supported Bond Issue or Supported Transaction, it is notrequired that the Trust Bonds in each Loss Position Subclass meet theLoss Subclass Percentage Requirement.

“Minimum Trust Debt Service” means, for the period, beginning on thedate of calculation, over which Supported Obligations and the relatedTrust Bonds are payable and for each Loss Position Subclass (togetherwith the lower Loss Position Subclasses), the sum for all Supported BondIssues and/or Supported Transactions of the following product: (a) theAverage Annual Debt Service payable on the bonds of each such SupportedBond Issue or Supported Transaction (and any Other Related Obligation),in each case measured to the final maturity thereof, multiplied by (b)the Aggregate Loss Subclass Percentage of such subclass for suchSupported Bond Issue or Supported Transaction. Minimum Trust DebtService may be modified by the Regulated Guarantor upon confirmation byeach Rating Agency that such modification will not result in a reductionof the Rating of any outstanding Supported Obligations or TrustCertificates. This definition is intended to ensure that there isadequate Trust Bond debt service in every Loss Position Subclass,together with the lower Loss Position Subclasses, even though forparticular Supported Bond Issues or Supported Transactions, there maynot be bonds in every Loss Position Subclass. The calculation of MinimumTrust Debt Service shall exclude any Supported Bond Issues or SupportedTransactions for which the capital is funded using the Cash AlternativeCapital Requirement, provided that such exclusion shall not beapplicable until the Allocated Capital Requirement exceeds the RatingMinimum Capital Requirement.

“Moody's” means Moody's Investor Services, Inc.

“Net Trust Bond Payments” means, with respect to each Supported BondIssue, the net amounts payable with respect to such issue taking accountof (a) all amounts payable by the issuer to the Support Trust withrespect to such issue, including debt service thereon, SupplementalCoupon payments, and any fees with respect thereto and (b) the portionof such amounts required to be applied to make the Trust CertificatePayments on related Trust Certificates and (to the extent such amountshave been dedicated to such purpose) unrelated Trust Certificates.

“Obligations” means Supported Bonds, Other Supported Obligations, TrustBonds, and Trust Certificates.

“Other Available Funds” means any funds received by the Trustee otherthan Trust Certificate Payments, Net Trust Bond Payments (except to theextent designated by the Regulated Guarantor as Other Available Funds),Capital, Liquidity, Reserves and proceeds from the sale of TrustCertificates.

“Other Supported Obligation” means an Other Related Obligation that isdesignated by the Regulated Guarantor as the beneficiary of a SupportRequirement hereunder.

“Other Related Obligation” means:

-   -   I. The following payments related to Supported Bonds, provided        in each case that either (A) such payments are on a parity with        such Supported Bonds or (B) the Bond Issue Rating for the        Supported Bond Issue by each Rating Agency is deemed to be the        same as such agency's Bond Issue Rating for such payments:        -   a. Payments due with respect to a line of credit or letter            of credit, insurance or reinsurance policy, or similar            instrument that secures payment of such designated bonds;            and        -   b. Payments due on any interest rate swap or similar            interest rate exchange agreement determined by the Regulated            Guarantor to be related to such designated bonds, and    -   II. Other payments related to such bonds, provided that the        Regulated Guarantor has approved including such payments as        Other Related Obligations and that each Rating Agency has        determined that including such payments as Other Related        Obligations will not result in a reduction of the Rating on any        outstanding Supported Obligations or Trust Certificates.

“Qualifying Bond” means a bond for which, at the time such bond isdesignated as a Supported Bond:

-   -   I. The Bond Issue Rating by each Rating Agency is in one of the        four highest rating categories and    -   II. The credit type of such bond is listed in Standard & Poor's,        in the 1^(st) or 2^(nd) Single-Risk Category as shown in        Exhibit II. The Regulated Guarantor may adopt a separate list of        qualifying credit types for each of Moody's and/or Fitch. The        credit type of each bond that is designated as a Supported Bond        must fit within the qualifying credit types for each Rating        Agency for whom such a list is specified.

The list of credit types or ratings relating to any Rating Agency may bemodified by the Regulated Guarantor upon confirmation by such RatingAgency that such modification is not inconsistent with their ratings andqualifying credit types previously in effect. Qualifying Bond shallexclude Appropriation Bonds unless the Specific Rating of such bonds isthe same as the Specific Rating on the issuer's relatednon-Appropriation bonds. A determination by the Chief Credit Officerthat a bond is a Qualifying Bond shall be dispositive for purposes ofthis Agreement.

“Rating” means a Supported Rating assigned to any Supported Bonds orOther Supported Obligations or a Structure Rating assigned to any TrustCertificates by a Rating Agency; provided, however, that for purposes ofthis Agreement, the Rating assigned to any such bonds by any RatingAgency shall not be deemed to be higher than the Target Rating withrespect to such bonds. For any Trust Bond and for any Other RelatedObligation (before taking account of any Support Requirement), Ratingmeans an Underlying Rating or Bond Issue Rating assigned to suchObligation by a Rating Agency.

“Rating Agency” means, with respect to the Supported Rating of anyseries or subclass of Supported Bonds (or any Other Supported Obligationrelated thereto) or the Structure Rating of any Trust Certificates, anynationally recognized rating agency which has provided a rating for suchseries or subclass or such Trust Certificates at the request of theRegulated Guarantor. With respect to the Underlying Rating or Bond IssueRating of any Supported Bond, Other Related Obligation, or Trust Bond,Rating Agency means any Rating Agency for the related Supported Bondswhich has provided an Underlying Rating or Bond Issue Rating, as thecase may be, for such Obligation.

“Rating Aggregate Loss Subclass Percentage” means, for each LossPosition Subclass and with respect to each maturity of each SupportedBond Issue or Supported Transaction, the Average Annual Assumed Defaultmultiplied by the Loss Subclass Minimum Coverage multiplied by the LossSubclass Discount Percentage multiplied by the Rating Loss SubclassCoverage Factor.

This represents the sum of the Rating Loss Subclass PercentageRequirements for each Loss Position Subclass and all of the lower LossPosition Subclasses. For example, initially, for an A rated city orcounty general obligation bond issue, the Rating Aggregate Loss SubclassPercentage for the 4th Loss Position Subclass equals 1.75% multiplied by1.00 multiplied by 100% multiplied by 1.6, which equals 2.80%.Correspondingly, the Rating Aggregate Loss Subclass Percentage for the3^(rd) Loss Position Subclass equals 1.75% multiplied by 0.80 multipliedby 25% multiplied by 1.6, which equals 0.56%.

“Rating Liquidity Multiple” means 2.0× or such higher multiple as may beestablished by the Regulated Guarantor. The Rating Liquidity Multiplemay be reduced by the Regulated Guarantor upon confirmation by eachRating Agency that such reduction will not cause a reduction of theRating of any outstanding Supported Obligations or Trust Certificates.

“Rating Loss Subclass Coverage Factor” means the Rating Trust CoverageRequirement divided by the Loss Subclass Minimum Coverage for thehighest Loss Position Subclass. For example, initially, the Rating LossSubclass Coverage Factor is 2.0 divided by 1.25 which equals 1.60.

“Rating Loss Subclass Percentage Requirement” means for each LossPosition Subclass and with respect to each maturity of each SupportedBond Issue or Supported Transaction, the Rating Aggregate Loss SubclassPercentage for such Loss Position Subclass minus the Rating AggregateLoss Subclass Percentage for the next lower Loss Position Subclass. Forexample, initially, for the 3^(rd) Loss Position Subclass, the LossSubclass Percentage Requirement equals 2.80% minus 0.56%, which equals2.24%. For a particular Supported Bond Issue, it is not required thatthe Trust Certificates in each Loss Position Subclass meet the RatingLoss Subclass Percentage Requirement so long as the sum of the TrustCertificates in all of the Loss Position Subclasses meets the RatingAggregate Loss Subclass Percentage for the highest Loss PositionSubclass.

“Rating Minimum Capital Requirement” means $200 million. Suchrequirement may be increased by the Regulated Guarantor at any time. TheRating Minimum Capital Requirement may be otherwise modified by theRegulated Guarantor upon confirmation by each Rating Agency that suchmodification will not result in a reduction of the Rating on anyoutstanding Supported Obligations or Trust Certificates.

“Rating Trust Coverage Requirement” means 1.5× for the purposes ofcalculating the Loss Subclass Percentage Requirements and Aggregate LossSubclass Percentages for a specific Supported Bond Issue or SupportedTransaction and means 2.00 for all other purposes hereunder (e.g., forthe purpose of calculating Minimum Trust Debt Service). This representsthe minimum Trust Certificate coverage of Average Annual AssumedDefaults for rating purposes. The Rating Trust Coverage Requirement maybe modified by the Regulated Guarantor upon confirmation by each RatingAgency that such modification will not result in a reduction of theRating of any outstanding Supported Obligations or Trust Certificates.

“Regulated Guarantor” means ______, a monoline insurer regulated underthe Insurance Law. There should be an agreement between the SupportTrust and the Regulated Guarantor in which the Regulated Guarantoragrees only to insure obligations that have a Support Requirement by theSupport Trust.

“Regulated Guarantor Action” means an action taken by an AuthorizedOfficer of the Regulated Guarantor or of its Administrator on itsbehalf, by written notice to the Trustee, which action is permittedunder the terms of this Agreement. Unless specifically stated herein,actions by the Regulated Guarantor authorized hereunder shall be takenby Regulated Guarantor Action and actions authorized hereunder to betaken by a particular officer of the Regulated Guarantor may be taken bythe corresponding officer of the Administrator.

“Regulatory Capital Requirement” means $65 million or such higher amountas shall be equal to the applicable minimum regulatory capitalrequirement to provide monoline insurance under the Insurance Law fromtime to time. This may not be used if the Capital Requirement is allused in a manner that permits it to be counted for regulatory purposes.

“Reserve Fund” means a fund established under this Agreement by theTrustee to hold the Reserves and investments thereof.

“Reserve Requirement” means a requirement established by a certificateof the Regulated Guarantor that one or more Reserves are to be createdand funded in the manner set forth in such certificate. Such certificate(a) shall set forth the order in which such Reserve shall be applied tocure a default with respect to Supported Obligations (b) may provide forthe reimbursement of such reserve from Trust Resources. Onceestablished, a Reserve Requirement, including the order in which thereserve can be used and the provisions for reimbursement thereof, mayonly be modified in accordance with the provisions, if any, formodification thereof that are set forth in the certificate establishingsuch requirement.

“Reserves” means funds being used to meet a Reserve Requirement.

“Specific Rating” means for each Rating Agency with respect to a bond orobligation, the rating of such bond including any pluses or minuses ornumerical designations.

“S&P's 2009 Monoline Criteria” means the criteria setting forth capitalcharges for monoline insurers in Standard & Poor's Global Bond Insurance20_ attached hereto as Exhibit II.

“Standard & Poor's” means Standard & Poor's, a Division of TheMcGraw-Hill Companies, Inc.

“Senior Credit Officer” means ______

“Structure Rating” means for each Rating Agency and with respect to eachsubclass of Trust Certificates, the rating assigned by such RatingAgency that reflects the risk that the amounts payable with respect tosuch certificates will be intercepted pursuant to Section 301 hereof.

“Supplemental Coupon” means, with respect to any Trust Bond maturity,any portion of the interest rate on such maturity which is in excess ofthe unenhanced interest rate otherwise payable by the issuer asdetermined by the Regulated Guarantor or Financial Advisor. SupplementalCoupon also shall also include, to the extent specified by the RegulatedGuarantor, (1) annual fees payable to the Trust in connection with aSupported Bond Issue or Transaction, (2) debt service on any additionalseries of bonds (or portion thereof) delivered to the Trust inconnection with a Supported Bond Issue or Transaction, or (3) paymentsgenerated from the investment of an amount deposited with the Trusteefor such purpose in connection with a Supported Bond Issue orTransaction. Supported Coupon payments shall be allocable to particularmaturities as directed by the Regulated Guarantor or Financial Advisor.

“Support Requirement” means any and all obligations of the Support Trustto provide Trust Resources (A) to the Regulated Guarantor to providefunds in the amount required to cure any default in the payment of debtservice on designated Qualifying Bonds or Other Related Obligations or(B) to other parties on behalf of the Regulated Guarantor to providefunds in such amounts or to reimburse funds used to provide suchamounts, together with interest thereon and/or related expenses, all ascontemplated by Section 301 of this Agreement.

“Supported Bond Issue” means an issue of bonds any portion of whichrepresents Supported Bonds. Unless the context otherwise requires, thephrase Supported Bond Issue shall refer only (a) to those maturities ofsuch issue for which there are Supported Bonds and (b) to that portionof such maturities which are Supported Bonds or Trust Bonds (the“related” Supported Bonds and Trust Bonds, respectively) and/or torelated Other Supported Obligations. Unless the context otherwiserequires, with respect to a Supported Bond Issue or SupportedTransaction, With respect to a specific Supported Bond Issue, any otherSupported Bond Issue (and the corresponding Trust Certificates) that hasthe same issuer credit, as determined by the Regulated Guarantor (evenif the legal entities issuing such bonds are different), shall be deemedto be related to such specific Supported Bond Issue. Any suchdetermination may be modified at the discretion of the RegulatedGuarantor based on then current facts and circumstances.

“Supported Bonds” means, with respect to a Supported Bond Issue orSupported Transaction, that portion of such issue which is thebeneficiary of a Support Requirement.

“Supported Obligations” means Supported Bonds and Other SupportedObligations. All Supported Obligations shall also be the beneficiariesof a monoline insurance policy issued by the Regulated Guarantor.

“Supported Rating” means, for each Rating Agency and with respect toeach Supported Bond and Other Supported Obligation, the rating assignedthereto that reflects the benefit of any Support Requirements.

“Supported Transaction” means all of the Qualifying Bonds of, and OtherRelated Obligations relating to, a Supported Bond Issue that either (i)become Supported Obligations as part of a single Designation or, (ii) ifelected by the Regulated Guarantor, are insured by the RegulatedGuarantor under a single insurance policy (and, in each case, anyrelated Other Supported Obligation). Unless the context otherwiserequires, the phrase Supported Transaction shall refer only (a) to thosematurities of the issue for which there are Supported Bonds as part ofthe transaction and (b) to that portion of such maturities which becomeSupported Bonds or Trust Bonds as part of the transaction.

“Support Trust” means the trust estate established pursuant to thisAgreement.

“Target Rating” means, for each Rating Agency and with respect to eachsubclass of Obligations, any target rating specified by the RegulatedGuarantor for such subclass of Obligations. For Supported Bonds, theTarget Rating shall mean a targeted Supported Rating. For each subclassof Trust Certificates, the Target Rating shall mean a targeted StructureRating for such subclass. Unless modified, the Target Ratings for theSupported Bonds and for each Loss Position Subclass for Moody's,Standard & Poor's and Fitch, respectively, shall be as follows:

-   -   Supported Bonds: Aaa/AAA/AAA    -   5^(th) loss: Aa/AA/AA    -   4^(th) loss: A/A/A    -   3^(rd) loss: Baa/BBB/BBB    -   2^(nd) loss: Ba/BB/BB    -   1^(st) loss: Not rated

Each Supported Bond and Trust Certificate may be in more than onesubclass with varying rights and may therefore have more than one TargetRating. Unless otherwise specified by the Regulated Guarantor, for TrustBonds, Target Rating means at any time the Underlying Rating or BondIssue Rating, as the case may be, of the related Supported Bonds. TheTarget Rating for any subclass of outstanding Obligations may not bereduced without the consent of the affected subclass.

“Trust Bond” means a bond deposited into the Support Trust at thedirection of the Regulated Guarantor and related to a specified TrustCertificate and the related Supported Bond Issue. Such Trust Bond maybe, but is not required to be, a part of such Supported Bond Issue.However, for purposes hereof, such Trust Bonds shall be deemed to bepart of such Supported Bond Issue. Prior to the use of Trust Bonds thatare not in fact, but are deemed to be, a part of the same bond issue asthe related Supported Bonds, each Rating Agency for the Supported Bondsmust confirm that the use of such Trust Bonds will not cause a reductionin the rating of any outstanding Supported Obligations or TrustCertificate.

“Trust Bond Payments” means, with respect to each Supported Transaction,the gross amounts payable to the Trustee with respect to the relatedSupported Bonds and Trust Bonds, including any annual or periodic feesfrom the bond issuer that are related to such transaction and payable tothe Trustee.

“Trust Certificate” means a certificate issued by the Support Trust atthe direction of the Regulated Guarantor which grants to the holderthereof the right to receive Trust Certificate Payments, subject to theterms of this Agreement with respect to the right and obligation of theTrustee to intercept such payments to secure each Support Requirementmade by the Support Trust. Each Trust Certificate shall be payableprimarily from payments received by the Support Trust with respect to aspecific Trust Bond (the “related” Trust Bond). Trust Certificates andthe related Trust Bonds shall be related to a specific Supported BondIssue as specified by the Regulated Guarantor. Each Trust Certificateshall have a principal amount equal to the principal amount of therelated Trust Bonds.

“Trust Certificate Payments” means, with respect to each TrustCertificate:

-   -   I. Payments of principal on the related Trust Bond at maturity        or upon earlier redemption (including sinking fund payments),        together with any redemption premium payable with respect to        such bond;    -   II. A specified portion of the payments of interest payable on        such related Trust Bond;    -   III. A specified portion of the payments of taxable interest        payable on such related Trust Bond;    -   IV. A specified portion of any other payments of various types        of interest or recurring fees payable with respect to the        Supported Bonds of the related Supported Bond Issue or other        Trust Bonds related to such bond issue; and    -   V. Other specified amounts from funds available under this        Agreement, including without limitation:        -   a. Debt service payments on related Trust Bonds or other            Trust Bonds that are received by the Support Trust and that            are not payable with respect to a specific Trust            Certificate;        -   b. Recurring fees payable to the Support Trust with respect            to any non-related Supported Bonds or Trust Bonds that are            not payable with respect to a specific Trust Certificate;            and        -   c. Any other Trust Bond Payments or Other Available Funds.

“Trust Coverage Requirement” means 2.00. This represents RegulatedGuarantor policy with respect to the minimum Trust Certificate coverageof Average Annual Assumed Defaults. The Trust Coverage Requirement maybe modified by the Regulated Guarantor upon notice to the Trustee andupon 30 days notice to each Rating Agency provided, however, that it maynot at any time be less than the Rating Trust Coverage Requirement.

“Trust Resources” means the following amounts which, to the extentavailable, may be used by the Trustee in accordance with this Agreementto fund any defaulted payments that are the subject of a SupportRequirement:

-   -   1) Trust Certificate Payments on certificates related to the        defaulted Supported Bond Issue:        -   First, such payments on certificates maturing on the dates            that any such defaulted payments are due (or on the            certificate payment dates corresponding to such dates),        -   Second, such payments that are due on any such dates with            respect to certificates maturing after such dates, and        -   Third, other such payments due after such dates and within            the shortest period needed to fully fund the requirements            payable from such Trust Resources;    -   2) Trust Certificate Payments on certificates that are not        related to the defaulted Supported Bond Issue:        -   To the extent consistent with the terms of this Agreement            and of the Trust Certificates, including, without limitation            terms concerning Loss Position Subclasses, Loss Category            Subclasses and Trust Subgroups, the Regulated Guarantor            shall exercise discretion as to:            -   Whether and when to apply such payments to fund the                requirements payable from Trust Resources, and            -   Which, if any, subclasses of Trust Certificates shall be                used to fund any such requirements or portion thereof        -   With respect to Trust Certificates within the same set of            applicable subclasses, as determined by the Regulated            Guarantor, requirements payable from Trust Resources shall            be funded within the shortest period needed to fully fund            such requirements from the date determined by the Regulated            Guarantor to begin or resume funding such requirements from            such set of subclasses.    -   3) Capital;    -   4) Liquidity from Borrowed Funds;    -   5) Liquidity from Liquidity Facilities;    -   6) Reserves established at the direction of the Regulated        Guarantor; and    -   7) Other Available Funds dedicated for such purpose at the        direction of the Regulated Guarantor.

“Trustee” means ______

“Trust Subgroups” means subclasses established by the RegulatedGuarantor by allocating all of the Supported Obligations, together withrelated Trust Bonds and Trust Certificates and specified portions of theCapital, Liquidity, Reserves and Other Available Funds, into distinctsubgroups such that:

-   -   I. Within each such Trust Subgroup, any losses from a default of        a Supported Obligation within such subgroup would be funded        first from Trust Resources allocated to such Subgroup (the        “related” subgroup). Trust Resources allocated to other Trust        Subgroups (“nonrelated” subgroups) may be applied only as deemed        necessary by the Regulated Guarantor to make timely payment of a        Supported Obligation or, to the extent that Trust Resources of        the related subgroup are deemed to be insufficient, to reimburse        amounts drawn from Liquidity or Capital allocated to the related        subgroup. Any amounts used from a nonrelated subgroup shall be        promptly reimbursed from Trust Resources of the related subgroup        as funds become available.    -   II. At the time each such Trust Subgroup is established, each        Rating Agency shall confirm that the creation of such subgroup        will not result in the reduction of the Rating on any        outstanding Supported Obligations or Trust Certificates.

Trust Subgroups previously established may also be modified by theRegulated Guarantor, provided that each Rating Agency shall confirm thatsuch modification will not result in a reduction in the Rating on anyoutstanding Supported Obligations or Trust Certificates.

“Underlying Rating” means for each Rating Agency and with respect toeach Obligation, the rating of such Obligation without regard to anySupport Requirement hereunder. The Underlying Rating of a TrustCertificate shall be the Underlying Rating of the related Trust Bond.For all purposes hereunder, Underlying Rating shall mean the ratingcategory of an Obligation, without regard to pluses or minuses ornumerical designations. For example, the rating of an Obligation with anassigned rating of A3 or A1 by Moody's or of A− or A+ by Standard &Poor's or Fitch, shall be “A”. For purposes of any provision of thisAgreement that requires a single Underlying Rating, the UnderlyingRating of a Supported Bond Issue shall mean the lowest Underlying Ratingof such issue from any Rating Agency unless (a) the Chief Credit Officershall specify that the Rating from another Rating Agency shall be usedor (b) the Regulated Guarantor shall adopt distinct methodologies forthe different Rating Agencies, which may occur only upon confirmationfrom each Rating Agency that the adoption of such distinct methodologieswill not result in a reduction in the Rating on any outstandingSupported Obligations or Trust Certificates.

“Weighted Average Capital Charge” means:

-   -   I. For the Supported Bonds of each Supported Bond Issue, (a) the        Average Annual Debt Service for such Supported Bonds multiplied        by the Capital Charge for such issue divided by (b) the sum of        the Annual Average Debt Service for the Supported Bonds of all        Supported Bond Issues; and    -   II. With respect to the entire portfolio of Supported Bonds, the        sum of the Weighted Average Capital Charges for all Supported        Bond Issues.

The Weighted Average Capital Charge may be modified by the RegulatedGuarantor upon confirmation by each Rating Agency that such modificationwill not result in a reduction of the Rating of any outstandingSupported Obligations or Trust Certificates.

Article II Section 201 Designation of Supported Bonds

At the time that any Supported Bonds and Other Related Obligations aredesignated by the Regulated Guarantor in connection with a SupportedTransaction:

-   -   A. Such Supported Bonds shall be Qualifying Bonds.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of a Senior Credit Officer or            of the Financial Advisor.    -   B. The amount of each Loss Position Subclass of Trust Bonds        related to such Supported Bonds shall be specified by a        certificate of the Regulated Guarantor or the Financial Advisor        or, if permitted hereunder, such certificate may specify that        the Cash Alternative Capital Requirement is being used.    -   C. The Trust Bonds related to such Supported Bonds shall meet        the Aggregate Trust Bond Requirement.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of the Financial Advisor.    -    This requirement shall not apply with respect to any Supported        Bond Issue or Supported Transaction for which capital is funded        using the Cash Alternative Capital Requirement.    -   D. For each Loss Position Subclass, together with the lower Loss        Position Subclasses and taking account of estimated debt service        on the designated Supported Obligations and related Trust Bonds,        the sum for all Supported Bond Issues and/or Supported        Transactions of the Average Annual Debt Service calculated        separately on each such Supported Bond Issue or Transaction, in        each case measured to the final maturity thereof, shall not be        less than the Minimum Trust Debt Service for such subclass.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of the Financial Advisor.    -   E. Upon such Designation and taking account of estimated debt        service on the designated Supported Obligations and related        Trust Bonds, the Default Tolerance Requirements for each Rating        Agency shall be met.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of the Financial Advisor.    -   F. The monoline insurance policy to be issued by the Regulated        Guarantor shall be in a form approved by each Rating Agency.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of Counsel or of the Chief            Legal Officer.    -   G. The amounts on deposit in the Capital Fund, the Liquidity        Fund (including any Liquidity Facilities) and any Reserve Funds        are not less than the Capital Requirement, the Liquidity        Requirement, and any applicable Reserve Requirement,        respectively, taking account of the designated Supported        Obligations and, in each case, less any amounts applied to cure        defaults pursuant to Section 301 that have not been reimbursed.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by certificates of (a) the Trustee stating the            respective amounts available in such funds (e.g., as of the            last semi-annual valuation date), (b) the Regulated            Guarantor indicating the deposits to such Funds since the            such last valuation date, and (c) the Financial Advisor            stating the respective requirements and indicating that the            following sums are at least equal to the respective            requirements:            -   i. The amounts on deposit in each such fund minus            -   ii. Any amounts that have been withdrawn pursuant to                Section 301 and that have not been reimbursed.    -   H. The Trust Bond Payments and Other Available Funds specified        by the Regulated Guarantor to make the Trust Certificate        Payments on the Trust Certificates related to such Supported        Transaction are sufficient for such purpose.        -   a. Satisfaction of this requirement may be conclusively            demonstrated by a certificate of the Financial Advisor.

For the purpose of performing the analyses required in connection withsubparagraphs D, E and H of this section in connection with aDesignation of Supported Obligations, the Financial Advisor may makesuch assumptions as it deems to be reasonable, including, withoutlimitation, with respect to: (1) the specific terms of the TrustCertificates related to the Supported Transaction such as certificatepayment dates and interest rates, (2) the amounts of variable interestrate payments, and (3) the amounts of interest earnings and OtherAvailable Funds. In the event that Trust Subgroups have been establishedhereunder, the requirements set forth in D, E, G, and H shall beseparately both to each Trust Subgroup and to this Agreement as a whole.The amount of Trust Bonds and related Trust Certificates for a SupportedBond Issue may be modified by certificate of the Regulated Guarantorsuch that either (1) a larger amount of bonds are designated asbeneficiaries of a Support Requirement or (2) the amount of Trust Bondsis reduced, provided that, at the time such certificate is delivered,the requirements of Section 201 are met for designation of the SupportedBonds.

Section 202 Trust Certificate and Trust Bond Requirements

The Regulated Guarantor shall provide reasonable notice to the Trusteeof the terms of the Trust Certificates relating to each SupportedTransaction, including the terms relating to the matters described inparagraphs I through V of the definition of Trust Certificate Payments.The Trustee shall issue and deliver such Trust Certificates to thepurchaser's thereof in connection with the closing of the SupportedTransaction and the delivery of a monoline insurance policy by theRegulated Guarantor. The payment dates of the Trust Certificates shallbe identical to those of the Supported Bonds unless otherwise specifiedby the Regulated Guarantor. An example of a form of Trust Certificate isincluded in Exhibit III.

Section 203 Default Tolerance

The Regulated Guarantor may establish, and may from time to time modify,a methodology for each Rating Agency for determining whether, at thetime the Supported Bonds relating to each Supported Transaction aredesignated, the Trust Resources available over the term of the portfolioof all Supported Obligations are sufficient to maintain the SupportedRatings of the Supported Obligations and the Structure Ratings of theportfolio of Trust Certificates. Any modification of such a methodologyfor a Rating Agency shall be effective only upon confirmation from suchRating Agency that such modification will not cause a reduction in itsRating of any outstanding Supported Obligations or Trust Certificates.

Article III Section 301 Obligation to Apply Trust Resources to CureDefaults

Each item listed in the definition of Trust Resources represents theloss position of the respective category of Trust Resources. The losspositions do not reflect the likelihood that a particular category ofresources will be drawn upon in order to prevent a non-payment ofSupported Obligations. However, the lower the number associated with aparticular category of Trust Resources, the greater the ultimateexposure to non-payment risk since the categories with the lower lossposition will be utilized to reimburse amounts that have been drawn fromhigher loss categories in order to cure a default. In establishingReserves or Other Available Funds, the Regulated Guarantor may assignthem a lower loss position than indicated in the definition of TrustResources.

In the event that the Trustee receives notice from the RegulatedGuarantor, any party designated by the Regulated Guarantor, or from apaying agent for a Supported Obligation that insufficient funds areavailable to make timely payment of amounts then due and owing withrespect to such Obligation, the Trustee shall:

-   -   I. Apply Trust Resources as necessary to provide the funds        needed to make full and timely payment of the Supported        Obligations. To the extent that the Regulated Guarantor, or        other party on its behalf, shall directly fund any such        defaulted payments and shall become subrogated to the rights of        the Supported Obligations, the obligation of the Trustee        hereunder to make timely payment of such amount shall run to the        subrogated party and the obligation to such party shall be        deemed to be the Supported Obligation hereunder. There shall be        no obligation hereunder to reimburse funds applied to pay        Supported Obligations pursuant to a guarantee on such        Obligations that existed at the time such obligations were        designated as Supported Obligations hereunder.    -   II. If Trust Resources are used to cure a default on a Supported        Obligation, the Trustee shall use available Trust Resources from        the lowest loss position categories of Trust Resources to make        timely reimbursement any amounts drawn from any higher loss        position category, with such reimbursement going first to the        highest loss position category that has not been fully        reimbursed. Amounts payable pursuant to this paragraph II shall        be subordinate to amounts then payable pursuant to paragraph I.    -   III. Intercept Trust Certificate Payments for the purpose of:        -   A. Making funds directly available to cure a default            relating to Supported Obligations;        -   B. Reimbursing amounts actually used to cure a default            either from higher loss categories of Trust Resources, from            Trust Certificates that are not related to the defaulted            Supported Obligations or from higher Loss Position            Subclasses of Trust Certificates; and        -   C. Paying interest or reimbursing lost earnings on amounts            used from higher Loss Category Subclasses of Trust Resources            and/or related expenses, but not interest on amounts            intercepted from non-related Trust Certificates or from            higher Loss Position Subclasses of Trust Certificates.

If the losses to be allocated within a set of subclasses to a maturityor payment date are less than the Trust Certificate Payments availableto fund the losses, such losses may be allocated in the discretion ofthe Regulated Guarantor either pro-rata or to bonds selected at random.

If the Trustee receives timely directions from the Regulated Guarantorconsistent with the terms of this Agreement and if adhering to suchdirections would (in the judgment of the Trustee) result in timelypayment of the Supported Obligations or timely reimbursement of TrustResources used to fund or reimburse such payments, the Trustee shallapply Trust Resources in accordance with such Regulated Guarantordirections. In the absence of direction from the Regulated Guarantor, ifsuch directions are not consistent with this Agreement, or if adheringto such directions would not (in the judgment of the Trustee) result intimely payment, the Trustee shall apply Trust Resources in accordancewith its best judgment in order to make timely payment of such SupportedObligations or such timely reimbursement. The Trustee may conclusivelyrely on advice of Counsel with respect to whether the RegulatedGuarantor's directions or the Trustee's proposed actions are consistentwith this Agreement.

Any recovery of defaulted payments realized with respect to any TrustBonds shall be applied to reimburse the various categories of TrustResources, including Trust Certificates, in accordance with thissection.

Section 302 Trust Certificate Proceeds

The Support Trust shall use the proceeds from the sale of TrustCertificates solely to pay the purchase price of the related Trust Bondsto the issuers or underwriters thereof.

Section 303 Obligation to Make Trust Certificate Payments; No Sale ofTrust Bonds

Each such Trust Bond shall be held by the Support Trust and, subjectonly to the right and obligation of the Trustee to intercept TrustCertificate Payments pursuant to Section 301 of this Agreement, theTrust Certificate Payments with respect to the Trust Certificatesrelated to such Bond shall be paid to the certificate holder on thepayment dates of the certificate and shall be of first priority underthis Agreement. The Trustee shall not sell, nor permit the sale ortransfer of, any Trust Bond without the consent of the certificateholder of the related Trust Certificate.

Section 304 Net Payments from Supported Bond Issues

The Net Trust Bond Payments with respect to each Supported Bond Issueshall be promptly paid to the Regulated Guarantor unless otherwisespecified by the Regulated Guarantor.

Section 305 Other Available Funds

Any Other Available Funds (including earnings on all of the funds andaccounts hereunder and including amounts held in the Capital, Liquidityor Reserve Fund that are in excess of the respective requirements)received or held by the Trustee shall be promptly paid as specified bythe Regulated Guarantor and, in the absence of other direction, shall bepromptly paid to the Regulated Guarantor. Any direction of the RegulatedGuarantor with respect to the disposition of Other Available Funds maybe modified by the Regulated Guarantor except to the extent expresslylimited in the document establishing such direction.

Section 306 Allocation of Potential Losses on Defaulted or DeterioratingCredits

The Regulated Guarantor may at its discretion designate which TrustCertificates will be subject to having their Trust Certificate Paymentsintercepted to cure a future payment defaults with respect to existingdefaulted credits or with respect to other specific credits, includingthe order in which such payments will be intercepted. The RegulatedGuarantor may also specify that in the event that any Trust Certificatesselected for such purpose are redeemed prior to the scheduled paymentdate thereof, the redemption proceeds may be retained by the Trustee tosecure such potential future payment defaults until such scheduledpayment date shall have passed.

The Regulated Guarantor may subordinate Trust Certificates outstandingprior to a specific date (relative to Trust Certificates issuedthereafter) with respect to the risk of default of a designatedSupported Bond Issues or Supported Transactions.

Article IV Section 401 Revenue Fund

Pending disbursement hereunder, Other Available Funds shall be held ondeposit in the Revenue Fund.

Section 402 Capital Fund

Unless being used pursuant to Section 301 to cure a default, Capitalshall be held on deposit in the Capital Fund. Such Capital shall be usedsolely for the purpose of curing defaults of Supported Obligations inaccordance with Section 301.

A portion of the Capital on deposit in the Capital Fund at least equalto the greater of the Regulatory Capital Requirement or the minimumsurplus to policy holders required under the Insurance Law shall beinvested in accordance with Section 1402 of Insurance Law.

Section 403 Liquidity Fund

Unless being used pursuant to Section 301 to cure a default or unlessheld by the Regulated Guarantor, Liquidity shall be held on deposit inthe Liquidity Fund.

Section 404 Reserve Fund

Unless being used pursuant to Section 301 to cure a default, Reservesshall be held on deposit in a Reserve Fund.

Section 405 Trust Certificate Fund Section 406 Other Funds and Accounts

At the direction of the Regulated Guarantor, the Trustee shall establishother funds and accounts provided that such directions are notinconsistent with the terms of this Agreement. Such funds and accountsshall be funded, applied, and modified as provided in such direction,provided that each Rating Agency shall have confirmed that such actionswill not cause a reduction in the Rating of any outstanding SupportedObligations or Trust Certificates. In addition, the Trustee may createsuch accounts within the funds established hereunder as it shall deemnecessary or desirable in order to carry out its responsibilities underthis Agreement.

Section 407 Valuation of Investments

Unless otherwise directed by the Regulated Guarantor, investmentshereunder shall be valued at amortized cost. Prior to any modificationof an existing valuation approach for any investments held under thisAgreement, each Rating Agency shall confirm that such modification willnot result in a reduction of the Rating on any outstanding SupportedObligations or Trust Certificates.

Article V Section 501 Miscellaneous

Provisions requiring consent of affected Trust Certificate holdersinclude:

-   -   Any change in the right of a certificate holder to be paid the        Trust Certificate Payments specified with respect to such        certificate, other than those provisions relating to        intercepting Trust Certificate Payments.    -   Any change in the order in which or purposes for which        outstanding Trust Certificate Payments are intercepted, except        that:        -   At the direction of the Regulated Guarantor, Loss Category            Subclasses may be created and/or modified in order to group            related credits and risks together so that the payments of            Trust Bonds that are similar to a defaulted Supported Bond            Issue are intercepted before the payments of dissimilar or            less similar credits as reasonably determined by the            Regulated Guarantor. However, no such change shall be made            which results in a reduction of the rating of any Trust            Certificate by any Rating Agency.        -   At the direction of the Regulated Guarantor, Trust Subgroups            may be created and/or modified, provided that prior to the            creation or modification of any Trust Subgroup, each Rating            Agency shall confirm that such action will not result in a            reduction of the rating of any outstanding Supported            Obligations or Trust Certificates.

The Regulated Guarantor shall exercise the voting rights of allSupported Bonds and Trust Bonds. The Trust Agreement may be amended asdirected by the Regulated Guarantor and without consent to adoptdistinct methodologies for the different Rating Agencies for designatingSupported Bonds, provided that any such amendment shall take effect onlyupon confirmation from each Rating Agency that the adoption of suchdistinct methodologies will not result in a reduction in the Rating onany outstanding Supported Obligations or Trust Certificates.

Except as noted above, amendments to the provisions of this Agreementcan be made which, in the reasonable judgment of the RegulatedGuarantor, do not materially adversely affect the rights or obligationsof either Supported Bonds or Trust Certificates; provided, however, thateach Rating Agency shall confirm that such amendments do not result inany reduction of the rating of any Supported Obligations or TrustCertificates.

The Trustee may conclusively rely on an opinion of Counsel with respectto the interpretation of any aspect of this Agreement. The Trustee shallinterpret this Trust Agreement in accordance with an opinion of ChiefLegal Counsel provided that the Trustee also receives a concurringopinion from Counsel.

Exhibit I Calculation of the Aggregate Loss Subclass Percentage and LossSubclass Percentage Requirement for an A Rated City or County GeneralObligation Bond Issue

Discount Percentage (Based on Bond Issue Supported Rating vs. BondRating Subclass Loss Achieved by Structure Aggregate Position TargetedSubclass, Rating for Loss Subclass Subclass together with DefaultMinimum next higher Coverage Subclass (from low Structure LowerPercentage Coverage Subclass) Factor Percentage Subclasse to high)Rating Subclasses (a) (b) (c) (d) =a * b * c * d Percentag 1st NR BB 7/4= 1.75 .56 2 Steps 2/1.25 = 1.6 .35 .392 lower; 15% 2nd BB BBB 7/4 =1.75 .64 1 Step lower; 2/1.25 = 1.6 .53 .056 20% 3rd BBB A 7/4 = 1.75.80 Same; 25% 2/1.25 = 1.6 .84 .112 4th A AA 7/4 = 1.75 1.00 1 stephigher; 3/1.25 = 1.6 4.20 2.24 100% 5th AA AAA 7/4 = 1.75 1.25 2 stephigher; 2/1.25 = 1.6 3.5 .70 100% Supported AAA 3.5 Bond Rating &Aggregate Trust Bond Requirement

Exhibit II

Capital Charges Percentages for Various Credit Types RepresentingAssumed Aggregate Percentage Defaults over a Four-Year DepressionScenario

Single-risk Ratings CCC B BB BBB A AA AAA category General ObligationStates 30 21 15 4 2 2 1 1 Cities and counties 100 70 50 13 7 5 4 1Schools—elementary and secondary 40 28 20 5 3 2 2 1 Special district 12084 60 16 8 6 5 1 Community college district 100 70 50 13 7 5 5 1Tax-Supported Debt Sales, gas, excise, gas and vehicle registrationLocal 150 105 75 20 11 8 6 2 Statewide 80 56 40 10 6 4 3 1 Guaranteedentitlements 100 70 50 13 7 5 5 1 Special assessments, Mello Roos, taxincrement 250 175 125 33 18 13 10 4 financings Hotel/motel 250 175 12533 18 13 10 4 Personal income Less than 1.0 million population 150 10575 20 11 8 6 2 More than 1.0 million population 80 56 40 10 6 4 3 1Cigarette, liquor 250 175 125 33 18 13 10 4 Health Care Hospitals 350245 175 46 25 18 14 6 Hospital systems (three or more hospitals with 300210 150 39 21 15 12 5 geographic dispersion) Hospital equipment loanprogram 350 245 175 46 25 18 14 6 Health maintenance organization 350245 175 46 25 18 14 6 Clinic practices closely affiliated with hospital350 245 175 46 25 18 14 6 Nursing home 350 245 175 46 25 18 14 6 Nursinghome system (three or more homes with 300 210 150 39 21 15 12 5geographic dispersion) Life-care center 350 245 175 46 25 18 14 6Life-care center system (three or more centers 300 210 150 39 21 15 12 5with geographic dispersion) Human service providers 200 140 100 26 14 108 3 Utilities Public power agencies and utilities with special 400 280200 52 28 20 16 6 project risk (1) Public power agencies and utilitieswith high 300 210 150 39 21 15 12 5 dependence on nuclear (2) Publicpower agencies and utilities with no special 150 105 75 20 11 8 6 2project risk and little nuclear dependence (3) Water, sewer, electric,and gas utilities (revenue- 120 84 60 16 8 6 5 1 secured) (4) Solidwaste disposal to energy or landfill project 250 175 125 33 18 13 10 4(single site) Solid waste system with landfill and/or waste-to- 200 140100 26 14 10 8 3 energy facility Solid waste transfer stations, trucks(no 150 105 75 20 11 8 6 2 landfill/waste-to-energy facility) SpecialRevenue Private colleges and universities and independent schoolsGeneral obligation 250 175 125 33 18 13 10 4 Auxiliary enterprises 350245 175 46 25 18 14 6 Public colleges and universities and communitycollege revenue bonds General obligation - unlimited-fee pledge 90 63 4512 6 5 4 1 General obligation - limited-fee pledge 100 70 50 13 7 5 5 1Auxiliary enterprises and related foundations 150 105 75 20 11 8 6 2Guaranteed student loans 100 70 50 13 7 5 5 1 Not-for-profit and501(c)3s 350 245 175 46 25 18 14 6 Charter schools 350 245 175 46 25 1814 6 Airports 120 84 60 16 8 6 5 1 Limited tax-backed 100 70 50 13 7 5 51 Passenger facility charge 200 140 100 26 14 10 8 3 Special facility(with rate flexibility) 160 112 80 21 11 8 7 2 Ports 180 126 90 23 13 97 2 Limited tax-backed 140 98 70 18 10 7 6 1 Special facility (with rateflexibility) 300 210 150 39 21 15 12 5 Parking 250 175 125 33 18 13 10 4Toll roads Five-year operating history 200 140 100 26 14 10 8 3 Lessthan five-year operating history 300 210 150 39 21 15 12 5 BridgesFive-year operating history 250 175 125 33 18 13 10 4 Less thanfive-year operating history 350 245 175 46 25 18 14 6 Federalgrant-secured obligations 160 112 80 21 11 8 7 2 Federal grant-securedobligations with additional 120 84 60 16 8 6 5 1 credit support HousingBonds HFA ICRs 150 105 75 20 11 8 6 2 PHA (capital fund financings) 200140 100 26 14 10 8 3 PHA ICRs 250 175 125 33 18 13 10 4 State agencysingle-family** 100 70 50 13 7 5 5 1 Local agency single-family** 200140 100 26 14 10 8 3 FHA-insured multifamily**¶¶ 6 4.2 3 0.8 0.4 0.3 0.21 Stand-alone affordable housing/Section 8/student 350 245 175 46 25 1814 6 housing Mobile home parks/single-borrower pools 300 210 150 39 2115 12 5 Military housing/multi-borrower pools 250 175 125 33 18 13 10 4Investor-Owned Utilities Electric distribution system 120 84 60 16 8 6 51 Water, electric, and gas 120 84 60 16 8 6 5 1 Gas distribution 150 10575 20 11 8 6 2 Telephones 150 105 75 20 11 8 6 2 Natural gas pipeline450 315 225 59 32 23 18 6 Source: Standard and Poor's Single RiskCategories

Exhibit III Sample Form of Trust Certificate

This Trust Certificate is related to the following Trust Bond: ______ inthe amount of $______.

This Trust Certificate is entitled to the following Trust CertificatePayments from such Trust Bond (subject to the right and obligation ofthe Trustee to intercept such Trust Certificate Payments to cure apayment default with respect Supported Obligations under the Agreement):

-   -   100% of the principal and redemption price payable on such Trust        Bond    -   100% of a first type of interest on such Trust Bond: ______%    -   The following supplemental coupon, which represents a portion of        the supplemental coupon payable on the such Trust Bond: ______%

Such Trust Bond is payable on ______ and ______ of each year. The TrustCertificate Payments shall be payable to the holder of this TrustCertificate (e.g., on the same dates as the Trust Bonds are paid).

This Trust Certificate is part of a series of Trust Certificates (the“Certificate Series”) issued on the date hereof and in the amount of$______ by ______ as Trustee under the Trust Agreement dated as of______ between the Regulated Guarantor and such Trustee (the“Agreement”). Unless otherwise defined herein or the context otherwiserequires, terms used herein shall have the meaning set forth in theAgreement. The rights of the holder of the Trust Certificate and thelimitations thereon are fully set forth in the Trust Agreement.

The Certificate Series is related:

-   -   A. To the following bond issue: ______ (the “Supported Bond        Issue”) and    -   B. More particularly, to a portion of such issue (the “Series        Trust Bonds”) in the same amount as such Certificate Series.

The Series Trust Bonds and the related Series Trust Certificates areboth related to a portion of the Supported Bond Issue in the amount of$______ (the “Series Supported Bonds”) which is the beneficiary of aSupport Requirement under the Agreement.

At any time, the Supported Bond Issue shall be deemed to include (and tobe related to):

-   -   I. All outstanding Series Supported Bonds related to the        Certificate Series together with all outstanding Supported Bonds        related to any additional series of Trust Certificates related        to the Supported Bond Issue that the Trustee has theretofore        issued (the “Supported Bonds” related to the Supported Bond        Issue), together with any Other Related Obligations; and    -   II. All outstanding Series Trust Bonds related to the        Certificate Series together with all outstanding Trust Bonds        related to any additional series of Trust Certificates related        to the Supported Bond Issue that the Trustee has theretofore        issued (the “Trust Bonds” related to the Supported Bond Issue).

The Trust Certificates related to such outstanding Trust Bonds representthe Trust Certificates related to such Supported Bond Issue.

This Trust Certificate is part of the ______ Loss Position Subclass.This Trust Certificate can also be part of the following Loss CategorySubclass within such Loss Position Subclass: ______

Pursuant to the Support Requirement under the Agreement which benefitsall Supported Bonds, the Trustee has the right and obligation in theevent of a payment default on:

-   -   a. The Supported Bonds (and Other Related Obligations) related        to the Supported Bond Issue, or    -   b. Any Supported Bonds (and Other Related Obligations) related        to any other Trust Certificates issued by the Trustee under the        Agreement,        to utilized Trust Resources, including Trust Certificate        Payments which would otherwise be payable to the holder of this        Trust Certificate, in order (1) to cure the default or (2) to        reimburse certain amounts that have been used to cure such        default together with interest on such amounts and/or related        expenses. In the event that Trust Certificate Payments are used        to fund such amounts, any payments thereafter made in respect of        such amounts shall be payable to the holder of record of this        Trust Certificate on the date such Trust Certificate Payments        were due.

What is claimed is:
 1. A computer-implemented method for minimizing afinancial risk associated with an anticipated value of an investment,which comprises: establishing by a computer system of an insurer acapital structure within a computer memory, the capital structuredesigned to minimize the risk and being structured with capital to funda default on payments associated with the investment; generating by thecomputer system a determination of whether the established capitalstructure is sufficient to cover a depression scenario period to obtaina minimal target credit rating for the insurer; and electronicallyreceiving the target rating based on the generated determination.
 2. Themethod of claim 1, wherein the investment comprises at least one of adebt, a bond or a loan, and wherein the establishing of the capitalstructure comprises: allocating the regulatory capital in the computermemory to an amount equal to at least a coverage factor multiplied by anaverage annual depression scenario default percentage for theinvestment; selecting by the computer system an investment criteria toinvest the regulatory capital to create an investment return; anddetermining by the computer system a portion of the capital structurefor a pledged insuring investment.
 3. The method of claim 1, whichfurther comprises: allocating, with the computer system, a first credithaving a first obligation to make specified payments and a second credithaving a second obligation to make specified payments, each of the firstcredit and second credit being in a non-default state when a respectiveobligation is met and being in a default state when a respectiveobligation is not met; associating, with the computer system, a firstsenior holder and a first subordinate holder with the first credit using(a) a respective first senior holder financial instrument through whichpayments from the first credit flow to the first senior holder and (b) arespective first subordinate holder financial instrument through whichpayments from the first credit flow to the first subordinate holder;associating, with the computer system, a second senior holder and asecond subordinate holder with the second credit using (a) a respectivesecond senior holder financial instrument through which payments fromthe second credit flow to the second senior holder and (b) a respectivesecond subordinate holder financial instrument through which paymentsfrom the second credit flow to the second subordinate holder; andstructuring the first senior holder financial instrument and the firstsubordinate holder financial instrument in the computer memory to givepriority to payments due the first senior holder prior to payments duethe first subordinate holder in the event the first credit enters thedefault state.
 4. A computer-implemented system for carrying out themethod of claim 1 and minimizing a financial risk associated with ananticipated value of an investment, comprising: a company computerimplemented component for establishing capital structure, determiningwhether the established capital structure is sufficient to cover thedepression scenario period and electronically receiving the targetrating based on the results of the determining step.
 5. A non-transitoryprocessor readable medium for carrying out the method of claim 1 forminimizing a financial risk associated with an anticipated value of aninvestment, comprising processor readable instructions that whenexecuted by a processor causes the processor to perform the recitedsteps of the method.
 6. A computer-implemented method for insuring adefault of a debt specified in a financial instrument, which comprises:establishing, by a computer processor, an insuring debt of a debtorrelated to the debt specified in a financial instrument; allocating bythe computer, in a computer memory associated with an insuring vehicle,a first loss class and a second loss class; and routing, over a computernetwork, a payment payable from the insuring vehicle to a first classholder in the first class, wherein the first class holder is entitled tothe payment based on an insured debt to the first class holder of theinsuring debt, wherein the insuring vehicle insures an obligation tomake payments for the insured debt.
 7. The method of claim 6, whereinthe insuring vehicle provides an insuring payment to a holder of theinsured debt when the debtor defaults on the obligation to make paymentsfor the insured debt and wherein the routing comprises intercepting atleast a portion of the insuring payment when the debtor defaults on theobligation to make payments for the insured debt and diverting at leasta portion of the payment to the first class holder.
 8. The method ofclaim 6, which further comprises providing an interactive user interfaceconfigured to provide a simulation of the capital structure including aninsuring scenario based on inputs for the capital structure, and whereinthe user interface provides a mechanism to change the inputs therebychanging the insuring scenario.
 9. A computer system for carrying outthe method of claim 6, including a device for debt management,comprising: a computer memory configured to manage financial data; and acomputer processor configured to perform the establishing, allocatingand routing actions of the method.
 10. A computer system for carryingout the method of claim 8, including a device for debt management,comprising: a computer memory configured to manage financial data; acomputer processor configured to perform the establishing, allocatingand routing actions of the method; and a graphical user interfaceconfigured to provide a simulation of the capital structure including aninsuring scenario based on inputs for the capital structure, and whereinthe user interface provides a mechanism to change the inputs therebychanging the insuring scenario.
 11. A non-transitory processor readablemedium for carrying out the method of claim 6, comprising instructionsthat are executable by a computer processor to cause the processor toperform the establishing, allocating and routing actions of the method.